Country Forecast
Argentina
August 2016 The Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom
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Argentina
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Contents
Country Forecast August 2016
3 3 3 3 4 4 4
Argentinahighlights
5
Fact sheet
6 6 6 7 8 8 9
Political outlook
10
Demographic assumptions
12 13 13 14 15 16 17 18 19 19
Business environment outlook Argentinars business environment at a glance Macroeconomic environment Policy towards private enterprise and competition Policy towards foreign investment Foreign trade and exchange controls Taxes Financing The labour market Infrastructure
21 21 21 22 22 23 24 25 25 26 26
Policy trends Fiscal policy Monetary policy International assumptions Economic growth Sectoral trends Inflation Exchange rates External sector Foreign direct investment in Argentina
28 28
Market outlook
31 31
The long-term outlook
Political outlook Demographic outlook Business environment outlook Economic outlook Market opportunities Long-term outlook
Political forces at a glance Political stability Political and institutional effectiveness Election watch Key players to watch International relations
Economic forecast
Market opportunities Long-term outlook
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Country Forecast August 2016
Argentina
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Methodology for long-term forecasts
36
Data summary
41
Data sources and definitions
42
Guide to the business rankings model
43
Indicator scores in the business rankings model
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Argentina—highlights Political outlook
Demographic outlook
• The president, Mauricio Macri, will persist with economic rebalancing measures to return the economy to sustainable growth. The adjustment process involves some politically unpopular austerity measures that will sustain the risk of social unrest and strikes by powerful unions in the short term. On top of this, Mr Macri is in a minority position in both houses of Congress. To Mr Macrirs benefit, however, a moderate faction of the dominant Peronist faction has proved co-operative in Congress to date, and strong presidential powers provide Mr Macri with some room for manoeuvre. On this basis, and based on an assumption of a relatively rapid economic recovery, The Economist Intelligence Unit expects governability to remain relatively good. Nonetheless, given his minority position in Congress, and the priority that will be given to urgent macroeconomic reforms, progress in the pursuit of reforms that would successfully address long-standing institutional weaknesses and structural constraints to growth is expected to be limited. Population (m) Total Male Female Period averages (%) Population growth Working-age population growth Labour force growth
2010 40.8 20.0 20.8
2015 43.1 21.1 22.0 2011-15 1.1 1.3 1.1
2020 45.4 22.2 23.1 2016-20 1.0 1.0 1.3
• Population growth has slowed in recent decades and is expected to remain below the Latin American average, although will be outpaced by growth in the labour force in the outlook period. An ageing population will place a heavy demand on healthcare services, which have deteriorated in recent years. The effects of this decline will be lasting, but relatively high skills levels mean that the stock of human capital will, nonetheless, remain a source of comparative advantage, although improvements in some other Latin American countries will narrow the gap between Argentina and much of the rest of the region. Business environment outlook
Value of indexa 2011-15 5.00
2016-20 6.25
Global rankb 2011-15 70
2016-20 52
Regional rankc 2011-15 10
2016-20 5
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
• Argentina’s position in our business environment ranking improves substantially between the historical and forecast periods. The very weak historical ranking reflects the legacy of expansionary and distortionary macroeconomic policies, and a deterioration in the legal and regulatory framework. The Macri administration has committed to eliminating distortions and, in many areas, such as exchange controls, results have already been achieved. Depending on their pace, scope and successful implementation, such reforms could lay the groundwork for even bigger improvements in our business environment rankings, but there is also a risk that implementation will be less successful than we currently assume, leading to poorer results than anticipated.
Country Forecast August 2016
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Economic outlook Real GDP growth (%) Consumer price inflation (av, %) Budget balance (% of GDP) Current-account balance (% of GDP) Money-market rate (av; %) Exchange rate Ps:US$ (av)
2015 2.4 26.5 -4.8 -2.5 22.0 9.2
2016 -1.2 42.8 -4.9 -2.7 31.7 14.9
2017 2.7 23.5 -4.3 -2.4 23.7 17.1
2018 4.0 13.6 -3.0 -2.1 14.3 18.8
2019 3.2 9.4 -2.8 -2.2 10.2 20.4
2020 3.4 7.9 -2.4 -2.1 9.1 21.8
• Economic rebalancing has subdued economic activity so far in 2016, but will eventually have some beneficial impact on net exports. Efforts will also be made by the Macri government to address the problem of legal and regulatory uncertainty, which should set the stage for renewed strong growth in fixed investment and private consumption, supporting an acceleration of GDP growth. There are downside risks to our GDP forecasts, as attempts by the government to reduce economic distortions and engineer a relatively smooth adjustment to a lower-inflation environment could prove extremely challenging, keeping both consumption and investment subdued for longer than we expect. There is also some upside risk, however, as investment could take off beyond expectations from 2017 once the gains from macroeconomic adjustment materialise and assuming that efforts to restore confidence in the rule of law make progress. But even in this scenario, in the absence of deeper structural reform than we currently envisage, the potential growth rate will remain closer to 3% than to 4%. Market opportunities
2015 GDP (US$ bn at market exchange rates) 632.2 GDP per head (US$ at market exchange rates) 14,657 Personal disposable income (US$ bn) 0.4 Household consumption (US$ bn) 416.2 Household consumption per head (US$) 9,650
2016 524.2
2017 585.2
2018 629.2
2019 659.2
2020 693.7
12,026 0.4 333.8 7,660
13,286 0.4 374.5 8,500
14,141 0.4 402.0 9,030
14,670 0.5 421.6 9,380
15,287 0.5 439.0 9,680
• Argentina’s wealth of natural resources, large domestic market with high per-head incomes relative to much of the rest of the region, and proximity and preferential access to the large Brazilian market represent attractive long-term opportunities for foreign investors (assuming that the Brazilian economy recovers gradually). However, the prospect of a difficult economic adjustment to rein in inflation will deter investment in the very short term, at least as businesses wait on the sidelines to ensure that Mr Macri has the political capital to push through politically and socially difficult adjustments. Long-term outlook Growth and productivity (% change; annual av) Growth of real GDP per head Growth of real GDP Labour productivity growth
2015-30
2031-50
2015-50
1.9 2.9 1.5
2.2 2.8 2.2
2.1 2.8 1.9
• We forecast that average annual GDP will grow by 2.8% in 2015-50, with the growth rate peaking at 3.1% in 2021-30 before slowing to 2.5% by 2041-50. Our forecasts assume that the contribution of capital to growth will be firm in the first part of the forecast period, before tapering off somewhat over the latter part of the outlook period. We also assume that as growth in the working-age population slows, the increase in the availability of labour will slow, as a result of which, growth will become more dependent on productivity gains. Country Forecast August 2016
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Fact sheet Annual data Population (m) GDP (US$ bn; market exchange rate) GDP (US$ bn; purchasing power parity) GDP per head (US$; market exchange rate) GDP per head (US$; purchasing power parity) Exchange rate (av) Ps:US$
2015 a 43.1 632.2 b 940.1 b 14,657 21,795 9.2 b
Historical averages (%) Population growth Real GDP growth Real domestic demand growth Inflation Current-account balance (% of GDP) FDI inflows (% of GDP)
2011-15 1.1 1.4 2.4 26.9 -1.4 1.8
a Economist Intelligence Unit estimates. b Actual.
Background: Economic liberalisation in the 1990s resulted in firm growth, but an inflexible exchange-rate mechanism and failure to deepen structural reform left the economy vulnerable to shocks, contributing to the collapse in 2001 of Fernando de la Rúa’s centre-left government. An interim government took power until Néstor Kirchner of the Peronist party began a term in 2003. He presided over an economic rebound, which enabled his wife, Cristina Fernández de Kirchner, to win the presidency in 2007 and secure re-election in 2011. Economic policy mismanagement drove a change of government in 2015, with the centre-right candidate, Mauricio Macri, taking office in December 2015. Political structure: Democracy was restored to Argentina in 1983 after 50 years of instability and military regimes. A strong presidential system is in theory checked by a bicameral Congress, comprising a 257-member Chamber of Deputies (the lower house) and a 72-member Senate (the upper house) but, in practice, the presidency dominates. The presidential term is four years. There are 23 provinces and the Buenos Aires federal district, each with its own government. Policy issues: Pro-cyclical expansionary policies contributed to GDP growth of an annual average 6.6% in 2005-11. But expansionary policy also produced significant imbalances in the economy in the form of double-digit inflation, real peso appreciation and a deterioration of the balance of payments. Amid currency pressures, the Fernández government resorted to foreign-exchange, import and capital controls, as well as ad hoc interventionism, to the detriment of the business environment. These policies did not reduce devaluation speculation, and left the economy extremely vulnerable to currency crisis. Macroeconomic adjustments to reduce economic distortions and set the economy on a more solid longterm footing are taking place under Mr Macri including peso devaluation and fiscal and monetary tightening. Microeconomic reforms to boost domestic supply are also getting under way. Taxation: The value-added tax (VAT) rate is 21%, although some goods and services are charged at a lower rate of 10.5%, and some services are charged at a higher rate of 27%. Corporate income tax is levied at 35% and personal income tax at progressive rates between 9% and 35%. There is a 0.6% tax on financial transactions (deposits and withdrawals). Foreign trade: The current account has shifted from surplus to deficit in recent years. Despite comprehensive controls, there was a current-account deficit of 2.5% of GDP in 2015. Major exports 2015 Processed agricultural products Manufactures Primary Fuel and energy
% of total 41.0 31.6 23.4 4.0
Major imports 2015 Intermediate goods Capital goods Fuels Consumer goods
% of total 30.3 19.7 11.4 11.3
Leading markets 2015 Brazil China US
% of total 18.1 9.1 6.3
Leading suppliers 2015 Brazil US China
% of total 23.7 17.2 16.4
Editors: Fiona Mackie (analyst); Beñat Bilbao-Osorio (consulting analyst) Editorial closing date: August 5th 2016 All queries: Tel: (44.20) 7576 8000 E-mail:
[email protected] Next report: To request the latest schedule, e-mail
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Political outlook Political forces at a glance
Present government: The president, Mauricio Macri, took office on December 10th 2015 for a four-year term ending in December 2019. Mr Macri was elected on the ticket of the Cambiemos electoral alliance. This alliance includes Mr Macrirs own party, the centre-right Propuesta Repúblicana (Pro), along with the centrist Unión Cívica Radical (UCR) and the smaller left-wing Coalición Cívica (CC). Mr Macri is in a minority in the Senate (the upper house of Congress), where the opposition Frente para la Victoria (FV, a faction of the Peronist party) holds a majority. In the Chamber of Deputies (the lower house), the FV has the largest number of seats of any single party but does not have a simple majority. Legislative forces (no. of seats) FV (large faction of Peronist party) Unión Cívica Radical (UCR)/Coalición Cívica (CC) Propuesta Repúblicana (Pro) Non-FV Peronists (various factions) Other Total
Political stability
Chamber of Deputies 70 46 41 87 13 257
Senate 38 9 6 12 7 72
The president, Mauricio Macri, who was inaugurated in December 2015 for a four-year term, is pressing on with a programme of economic policy adjustments. Mr Macri, of the centre-right Propuesta Republicana (Pro) party, is working to reduce economic distortions and return the economy to sustainable growth. Reflecting the scale of economic mismanagement under the previous government, the adjustment process requires politically unpopular austerity measures. Half-way into his first year in government, these measures are starting to take their toll on Mr Macrirs popularity: the presidentrs opinion poll ratings remain solid at over 50%, but have fallen by around 10 percentage points since he took office. The combined effect of a post-devaluation inflationary spike, cuts in energy and transport subsidies and monetary policy tightening is hitting consumers hard, and their patience with adjustment is wearing thin, despite government promises that adjustment will eventually reduce inflation and promote faster growth. So far, however, governability has not suffered dramatically. Mr Macri had his first real clash with the opposition-led Congress in May, when he was forced to use his presidential veto to reject a populist six-month firing freeze. The ruling Cambiemos alliance, which includes the Pro as well as the Unión Cívica Radical (UCR), does not have a majority in either house of Congress, and will have to negotiate support for its legislative agenda with the various factions of the large Partido Justicialista (the Peronist party). However, notwithstanding debate over the firing freeze and unpopular tariff increases, to date Mr Macri has not had trouble passing key reforms (including approval for a landmark deal with holdout creditors approved by Congress in March), not least because the Frente para la Victoria (FV), the leftist-populist Peronist faction of the former president, Cristina Fernández de Kirchner, has been hit by a series of damaging corruption scandals in recent months, and has been weakened substantially.
Country Forecast August 2016
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Going forwards, The Economist Intelligence Unit expects obstructionism to increase amid election-related politicking surrounding the October 2017 mid-term election. But mutual interest will ensure some continuing co-operation between Cambiemos and moderate Peronists throughout the forecast period. On top of this, a strong executive branch (the president has substantial powers to rule by decree) should provide Mr Macri with room for manoeuvre, even assuming that Congress becomes less co-operative. As a result, we expect some continued progress on the government agenda. However, with electoral considerations coming into play, there is likely to be limited progress on the pursuit of legislation that would successfully address long-standing institutional weaknesses and structural constraints to growth. Comprehensive reforms to strengthen bureaucracy, reduce corruption or enhance the effectiveness and independence of the judiciary will be slow. Nor do we expect meaningful advances on a structural reform agenda (to include comprehensive tax and labour market reform). Combined, these factors will limit the quality of policymaking and the rate of economic growth in 2016-20. Political and institutional effectiveness
Reforms to improve legal system are required
Country Forecast August 2016
A concentration of power in the executive helps to speed progress with the government agenda, but results in a lack of transparency in decision-making. The trend towards a concentration of power in the executive has occurred ever since the 2001-02 economic crisis, at which point extraordinary powers were given to the president to expedite policymaking. More than a decade on from the crisis, these extraordinary powers have become entrenched, although there is some possibility that they will be gradually weakened under Mr Macri, who is in a minority position in Congress and who has pledged to emphasise consensus and transparency in government policymaking in his tenure. Although Mr Macri may be more likely to pursue them than his predecessor, reforms that would successfully address long-standing institutional weaknesses and strengthen the bureaucracy will prove politically difficult. The permanent state bureaucracy is made up mainly of low-paid clerical jobs. The professionals responsible for designing and implementing policy are appointed on short-term contracts, which are renewed with each change of government (or even minister). Reforms are required to improve the legal system, which has for decades been plagued by corruption and inefficiency. Under Ms Fernández, the courts came under growing pressure to side with the government. However, they successfully resisted a controversial reform proposal presented by Ms Fernández, which contained a number of divisive proposals that ultimately threatened judicial independence. The reform was passed by a razor-thin majority in Congress, but was later declared unconstitutional by the Supreme Court and did not come into effect. The election of a non-Peronist executive provides some opportunity for a new judicial reform proposal that addresses the problems of corruption and inefficiency in the judiciary (there has been a historic tendency for executive-branch overreach among Peronists). Significantly, upon taking office Mr Macri quickly filled two vacant seats on the Supreme Court with candidates viewed as highly qualified and unbiased. However, we are not optimistic about significant reform measures being taken in the short term, given Mr Macrirs minority position in Congress, and the need to save his
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political capital to push through the many difficult economic adjustments that are required to put the economy on a more sustainable footing. However, without a strengthening of the legal system, it will be difficult to address the problem of corruption in government. Election watch
Mr Macrirs Pro party is small but increasingly influential. Apart from the presidency, it now controls the governments of Buenos Aires city (the capital) and province, which together account for almost half of the population. However, the Pro is in a minority position in both houses of Congress, and will not have another chance to improve its position until mid-term legislative elections in October 2017. The Pro will hope that macroeconomic adjustments will by then have set the economy on a more solid footing, leaving it well placed for the mid-term elections. In the meantime the president will face the challenge of keeping his coalition partners, including the UCR and the smaller, centre-left Coalición Cívica, on-side, while building bridges with the Peronists. Although the Peronist party was defeated in the 2015 election, the two main wings of the party have a combined majority in both houses of Congress; they also control 12 of the 24 provincial governmentspowerful political forces in their own right. As it loses the powers of patronage bestowed on it by the presidency and struggles with corruption allegations, the leftist-populist FV wing of the party will lose influence, and the position of the traditional Peronist wing will improve, leaving it well placed to make gains at the expense of the FV in the 2017 mid-term elections. Reflecting our assumption that economic recovery will be gathering pace by then, the ruling Pro is also likely to make some modest gains, although Peronism will remain the dominant force in Congress after the mid-term elections.
Key players to watch Mauricio Macri Mr Macri is one of the very few non-Peronist politicians to translate popularity at the local level into a presidential victory. Previously the popular right-wing mayor of Buenos Aires city, a centre of opposition to the then president, Cristina Fernández de Kirchner, Mr Macri was able to secure an electoral alliance with the centrist Unión Cívica Radical (UCR) that gave him the nationwide political structure that he needed for a successful presidential campaign. Mr Macrirs biggest political challenge to date has been in seeking consensus for difficult economic adjustments. So far, he has been successful; although his opinion poll ratings have slipped, they remain relatively high (above 50%). His negotiating skills (and those of key cabinet members) have been put to the test and have also proved successful so far, with major reforms including legislative approval for a deal with holdout creditors approved early on in his term.
Marcos Peña Mr Peña, a close ally of the president, was appointed cabinet chief after serving in the same post in the Buenos Aires city government under Mr Macri. Mr Peña was elected to the Buenos Aires city government when he was just 26 years old, and was, with Mr Macri, one of the founders of the centre-right Propuesta Repúblicana (Pro) party. He plays a key role in the Macri administration as chief negotiator, both in Congress and in cabinet, and is at the centre of the most important government decisions.
Country Forecast August 2016
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Alfonso Prat-Gay The finance minister, Mr Prat-Gay is an economist, and was most recently a legislator for the Coalición Cívica. Before that he was president of the Banco Central de la República Argentina (the Central Bank) in 2002‑04, a period of post-crisis stabilisation that will provide the necessary experience for the huge economic policymaking challenges that lie ahead. He has occasionally appeared to be at odds with the current Central Bank president, Federico Sturzenegger, over both the pace of monetary easing after a sharp spike in interest rates at the start of Mr Macrirs presidency, and over the pace of fiscal tightening (with Mr Prat-Gay pressing for faster interest rate cuts and Mr Sturzenegger emphasising the role of fiscal policy in reducing inflationary expectations while plumping for a more cautious stance on monetary easing).
Susana Malcorra With the appointment of Ms Malcorra, previously chief of staff to the secretary-general of the UN, Ban Ki-moon, as foreign affairs minister, Mr Macri sent a strong signal of his intention to improve diplomatic and trade relations with key partners. Ms Malcorra, an appointment from outside of Mr Macrirs Cambiemos alliance, is well respected in diplomatic circles because of the key roles she has held within both the UNrs World Food Programme and its peacekeeping department. She also has vast experience in the private sector and is helping to foster an investor-friendly image.
Cristina Fernández de Kirchner Although she holds no public post, the former president has been a thorn in Mr Macrirs side and a fierce critic of economic adjustment measures under the new government. However, her influence appears to be waning as her political movement (the Frente para la Victoria, a left-wing faction of the Peronist Party) struggles under a cloud of corruption allegations during Ms Fernándezrs presidency. Before corruption allegations against members of her government surfaced, Ms Fernández was thought likely to run for Congress in 2017, in an effort to position herself for another run at the presidency in 2019. However, the public mood seems to be shifting away from Ms Fernández, leading to a battle for control of the Peronist party among more moderate factions of the party.
Juan Manuel Urtubey, Daniel Scioli Mr Urtubey, the governor of Salta province, has been outspoken in the past year against Ms Fernández, and could prove a unifying figure for key Peronist politicians, including a number of governors who did not identify with Ms Fernándezrs lunge to the left of recent years and who represent more traditional Peronist views, closer to its trade-unionist roots. Mr Urtubey may be joined byor see competition fromDaniel Scioli, the FV candidate in last yearrs presidential election. Mr Sciolirs reaction to defeat was markedly more composed than Ms Fernándezrs, hewing to a desire among non-FV Peronists for a more measured approach to leadership.
International relations
Country Forecast August 2016
Efforts by the Macri administration to repair relations with trade and investment partners have achieved rapid results, with Argentina agreeing a deal with holdout creditors in February that saw the country exit default and issue US$16.5bn in debt in international markets in April. The removal of a host of import and foreign-exchange controls, combined with the resolution of a number of investment disputes, is also helping to improve relations with Europe and the US. China will, meanwhile, remain a strategic partner. The bilateral relationship was cemented under the previous administration by a series of investment accords. A change of government in Brazil is likely to facilitate closer diplomatic and trade ties between Argentina and its larger neighbour, with both governments keen to seek trade deals under the auspices of the Mercado Común del Sur (Mercosur, the Southern Cone customs union). The problem for Argentina and its Mercosur partners is that, just as the grouping has started to reverse its own protectionist tendencies, free trade has shifted off the political agenda in both the EU and the US. Our forecasts do not currently assume any free-trade deals with the US or EU. Efforts at joining the Alianza del Pacífico (Pacific Alliance, regional trading bloc) may also make progress, although this is not currently reflected in our five-year economic forecasts.
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Demographic assumptions Demographic profile Population (m) Total Male Female Age profile (% of total population) 0-14 15-64 65+ Young-age dependency ratio Old-age dependency ratio Working-age population (m) Urbanisation (% of total) Labour force (m) Period averages Population growth (%) Working-age population growth (%) Labour force growth (%) Crude birth rate (per 1,000) Crude death rate (per 1,000) Infant mortality rate (per 1,000 live births) Life expectancy at birth (years) Male Female Average
2010
2015
2020
40.8 20.0 20.8
43.1 21.1 22.0
45.4 22.2 23.1
24.9 64.5 10.6 0.39 0.16 26.3 91.0 16.5
23.9 64.9 11.2 0.37 0.17 28.0 91.8 17.5
23.1 64.9 12.0 0.36 0.19 29.4 92.7 18.7
2011-15 1.1
2016-20 1.0
1.3 1.1 17.1 7.7
1.0 1.3 16.4 7.7
10.2
9.0
71.8 79.5 75.7
72.8 80.3 76.5
Sources: International Labour Organisation (ILO), labour force projections; Economist Intelligence Unit estimates and forecasts; national statistics.
Population growth will remain slow
Population growth has slowed in recent decades and is expected to remain below the Latin American average. Owing to a relatively low birth rate, the percentage of the population aged 14 or under is low by Latin American standards, and is falling. A declining gross birth rate and longer life expectancy also account for the high and rising share of the population aged 65 years and over, although, at just over 11% this is still below that of OECD countries, where shares above 15% are the norm. Even so, the ageing population places a heavy demand on Argentina’s healthcare services, which have deteriorated significantly in recent years. The future solvency of the social security system is also in doubt, owing to widespread arrears on contributions, raising the risk that many will reach retirement age without social security coverage. The forecast rise in the economically active portion of the population is chiefly the result of an expected increase in female participation rates. The latter have increased gradually to 48% in 2013 (latest available data) from 45% a decade earlier. This is still below a total labour force participation rate of over 60% (and below the OECD average female participation rate of 53%) and can be expected to rise towards 50% in the forecast period. Although the gross birth rate is
Country Forecast August 2016
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forecast to fall over the next decade, the gross mortality rate is expected to stay broadly constant as the ageing of the population offsets improvements in healthcare conditions. Argentina has in the past been the recipient of much inward migration (an estimated 85% of the population is of European descent) and has established quite a flexible approach to immigration. The Economist Intelligence Unit expects policy in this area to remain relatively flexible in the forecast period, enabling economic sectors such as agriculture and construction to continue to benefit from immigrant labour. Our positive medium-term economic forecasts for Argentina suggest that inward migration could pick up in the forecast period, following a period of substantial outward migration in recent decades. Partly owing to strong ties to Europe, some 600,000 Argentinians are estimated to live abroad. Around one-third of these emigrated in the years immediately following the 2001-02 economic crisis. These newer emigrants are mainly middle-class young people who have moved to Spain, Italy and the US, many of whom benefit from dual Italian or Spanish citizenship. An urban population with marked regional disparities
The population is highly urbanised. More than 90% of the country’s population is concentrated in urban centresone of the highest ratios in the world. The Buenos Aires metropolitan area contains almost one-third of the national population; when the hinterland of Buenos Aires (the pampas) is included, the proportion rises to two-thirds. Overall, population density is low, at 13 inhabitants per sq km (around one-third of the Latin American average), although this aggregate figure masks wide regional disparities: in the federal district there are 13,679 inhabitants per sq km, whereas in the southern provinces of Santa Cruz and Chubut, population density is just 0.8 and 1.8 inhabitants per sq km respectively. Most measures of social and economic development show marked disparities between rural and urban areas, with per-head incomes, and healthcare and education indicators much better in the Buenos Aires area than elsewhere.
Argentina's lead in regional healthcare and education standards will erode
Although Argentina’s healthcare indicators still compare favourably with those of most of its neighbours, social conditions worsened markedly during the 1998-2002 recession, and in many areas problems have persisted despite firm growth for most of the following decade, suggesting that expenditure has become inefficient. The healthcare and education systems are in urgent need of reform. Even so, a high level of educational attainments by regional standards mean that the stock of human capital will remain a source of comparative advantage, although improvements in some other Latin American countries will close the gap within the region.
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Business environment outlook Business environment rankingsa
Overall position Political environment Political stability Political effectiveness Macroeconomic environment Market opportunities Policy towards private enterprise & competition Policy towards foreign investment Foreign trade & exchange controls Taxes Financing The labour market Infrastructure
Value of indexb 2011-15 5.00 5.2 5.9 4.5 4.9 5.4
2016-20 6.25 6.4 7.0 5.8 6.9 5.5
Global rankc 2011-15 70 50 49 50 76 38
2016-20 52 36 36 35 47 39
Regional rankd 2011-15 10 5 7 5 11 3
2016-20 5 3 5 3 6 3
4.5 4.6 4.6 4.1 4.0 5.7 7.0
6.5 6.9 6.4 4.8 6.3 5.9 7.0
59 70 73 80 72 55 36
35 42 65 78 53 59 42
9 9 10 12 8 6 2
2 5 9 11 5 6 2
a See Guide to the business rankings model at the end of this report. b Out of 10. c Out of 82 countries. d Out of 12 countries: Argentina, Brazil,
Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Improvement of investment environment under new government
The Economist Intelligence Unit’s global business rankings measure the quality and attractiveness of the investment environment in 82 of the world’s largest economies, including 12 in Latin America. Argentinars 18-place jump in the global rankings is one of the most significant improvements globally (second only to Serbiars 19-place improvement). Partly, Argentinars improvement reflects a particularly poor 2011-15, characterised by the then-governmentrs expansionary and distortionary macroeconomic policies, a weak legal and regulatory framework as a result of ad hoc government interventionism, and policies that deterred trade and investment. The new government, led by Mauricio Macri, which took office at the end of 2015, has already made significant strides in rolling back these policies and eliminating distortions, resulting in a noticeable improvement in the investment climate and prompting an improvement in the component scores across most areas of the business environment. Our forecasts currently assume that there will continue to be relatively rapid, large improvements in a number of key areas of the business environment, including the macroeconomic environment, policy towards private enterprise and competition, foreign trade and exchange controls, and financing. To Argentinars benefit, it already scores highly in a number of categories in which improvements are generally difficult and take longer to bear fruit, such as infrastructure, market opportunities and the labour market. Argentinars worstscoring category will remain tax, as improvements to the burdensome, unwieldy tax system will prove extremely difficult politically.
Country Forecast August 2016
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Argentinars business environment at a glance Policy towards private enterprise and competition 2016-17: The Macri administration works to address key weaknesses, including weak competition policy, the heavy burden of red tape and restrictive price controls. 2018-20: Continued work to build confidence in legal and regulatory framework. State participation in key sectors continues.
Policy toward foreign investment 2016-17: Efforts to resolve disputes with international creditors and investors as the government seeks fresh sources of USdollar inflows. 2018-20: Foreign direct investment is welcome. Improvement in investment dispute settlement and availability of investment-protection schemes.
Foreign trade and exchange controls 2016-17: Moves by Macri administration in 2016 to ease foreign exchange and capital controls. Efforts to improve relations with foreign investors and creditors, after a series of disputes in prior years. 2018-20: Possibility that free-trade agreements (FTAs) make better progress under Macri administration. Possible FTA between Mercosur and the EU, although obstacles to a deal on both sides will persist.
Taxes 2016-17: Export taxes reduced in 2016 to encourage domestic supply. Tax system remains complex and burdensome. 2018-20: Comprehensive tax reform to improve federal-provincial revenue sharing remains unlikely.
Financing 2016-17: Banking penetration remains weak and long-term credit restricted, particularly for small and medium-sized enterprises, owing to weak long-term deposit base. 2018-20: Non-bank financing grows, but is constrained by a relatively small pool of institutional investors.
The labour market 2016-17: Tension with the unions, owing to inflation. Political and bargaining power of the unions will remain strong. 2018-20: Progress on labour reform unlikely. Continued potential for conflicts with unions. Some skills shortages.
Infrastructure 2016-17: The Macri administration works to address the problems of weak contract rights and deficient regulatory regimes, which keep private investment below potential. Financing constraints hamper public investment in the short term. 2018-20: Some public and private investment set to improve energy supply and upgrade export infrastructure, but the risk of energy shortages will persist as demand grows. Progress on improving broadband infrastructure.
Macroeconomic environment
Value of indexa 2011-15 4.9
2016-20 6.9
Global rankb 2011-15 76
2016-20 47
Regional rankc 2011-15 11
2016-20 6
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Macroeconomic environment will improve as forecast period progresses
Country Forecast August 2016
Argentina’s global and regional ranking for the macroeconomic environment improves substantially between the historical and forecast period. The weak score in 2011-15one of the worst in our global modelreflected the highly distortionary policy environment under Mr Macrirs predecessor, Cristina Fernández de Kirchner (2007-15). The institutional underpinnings of macroeconomic stability were poor, with a politicised Central Bank taking monetary policy decisions based on the governmentrs fiscal demands and
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highly questionable official statistics, following a change of methodology and staffing at the Instituto Nacional de Estadística y Censos (Indec, the official statistics institute). The weak quality of policymaking also undermined the macroeconomic environment. We expect significant improvements in all of these areas during 2016-20. Mr Macrirs policy stance is much more investor-friendly, leading to an improvement in the quality of policymaking, and he has already started to address the distortions put in place by the previous administration. The new government has also pledged both to improve the quality of information and to restore operational independence to the Central Bank, in the first instance via the introduction of new technocratic leadership in these state bodies. Assuming that these efforts continue, Mr Macri should lay the foundations for a firmer medium-term economic performance. Nonetheless, the impact of sharp fiscal and monetary policy adjustments will take their toll on the economy in 2016, when we are forecasting a mild recession, higher inflation and a widening of the fiscal deficit. The fact that Argentinars overall score and ranking in this area improves in 2016-20 is based on the assumption that the negative effects of the policy adjustment pass relatively rapidly, with the economy returning to growth from 2017 and performance across most variables improving significantly from 2018 (accounting for the majority of the forecast period). One of the only variables to deteriorate during the forecast period will be the current account, with the deficit expected to widen from an annual average of 1% of GDP in 2011-15 to 2.3% of GDP in 201620. However, this will largely reflect an easing of controls, and will be offset by much firmer financing conditions, with rising capital inflows resulting in a rebuilding of international reserves. There are downside risks attached to these projections. The assumption of a relatively smooth transition out of recession and towards a (relatively) lowinflation environment with a more sustainable external position may be overly optimistic, given Argentina’s track record (the country has a history of economic instability and disorderly swings from one economic model to another). Given the scale of distortions that Mr Macri has inherited, as well as structural constraints to a low-inflation environment such as wage indexation, it will take time to engender confidence in the Central Bankrs capacity to contain inflation. Policy towards private enterprise and competition
Value of indexa 2011-15 4.5
2016-20 6.5
Global rankb 2011-15 59
2016-20 35
Regional rankc 2011-15 9
2016-20 2
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Return to market-friendly policy stance
Country Forecast August 2016
Argentina’s score and ranking for private enterprise and competition improves substantially for the 2016-20 forecast period under our assumption that the new government will continue to introduce policies that actively encourage private investment and promote competition. The Fernández government had a track record of arbitrary decision-making that was often detrimental to the private sector and eroded confidence in the legal framework. It also persistently focused its efforts on managing the economy at the company level (rather than adopting sounder fiscal or monetary policies), hampering the freedom of businesses to www.eiu.com
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compete and giving rise to allegations of crony capitalism. Under Mr Macri, we expect a revamped competition commission to focus in the short term on amendments to anti-trust legislation. Across the public sector, a reduction in red tape is likely. The government will also work towards reducing price controls in a host of areas as an incentive to domestic supply. Although these efforts will be hampered by lobbying by special interest groups, in the context of Argentinars long tradition of political clientelism, we expect significant improvements in all of these areas. Meanwhile, state participation in key sectors, including energy, utilities and banking, is expected to continue. • Although agricultural export taxes and quotas are being scaled back as promised by Mr Macri during his 2015 election campaign, there is a risk that the pace may slow in the context of domestic economic difficulties. Immediately upon taking office, Mr Macri eliminated export taxes on wheat, beef and corn. He also reduced the tax on soybeansthe most important export cropfrom 35% to 30% in early 2016 and was expected to continue cutting the tax by 5 percentage points each year. However, there has been speculation that fiscal difficulties may prompt the government to keep the export tax at 30% in 2017. • There is also a risk that the process of scaling back price controls may be interrupted (or even reversed). Upon taking office, the government kept the price control programme Precios Cuidados in place as it sought to curb the passthrough effect on inflation of currency devaluation. However, the number of basic consumer items covered was cut from 500 to 317. But in May 2016, 83 new products were added to the list. There has also been some backtracking in efforts to raise electricity and natural gas tariffs. Following a removal of subsidies and an increase in wholesale prices in January, in July the government announced that it would cap price increases for end-users at 400% (500% for businesses). The Economist Intelligence Unit continues to believe that the government remains committed to removing price controls and subsidies, with these developments reflecting an official acknowledgement that measures are needed to cushion the impact of what are significant adjustments on consumers. • Under Ms Fernández, the Comisión Nacional de Defensa de la Competencia (CNDC, the competition authority) was a weak and ineffective body, doing little to prevent monopolistic practices or protect consumer rights. This is expected to change under Mr Macri. He appointed a new head of the CNDC in February, Esteban Greco, who immediately performed an internal audit and made significant staff changes. Aside from case studies assessing competition in 11 targeted sectors, the CNDC is also expected to work with the government to craft a reform to the current anti-trust law. Closer co-operation with US competition authorities to train staff on mergers and acquisitions will also raise standards in this area. Policy towards foreign investment
Value of indexa 2011-15 4.6
2016-20 6.9
Global rankb 2011-15 70
2016-20 42
Regional rankc 2011-15 9
2016-20 5
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Country Forecast August 2016
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Foreign investment to pick up
Out of all of the areas comprising the overall business environment rankings, Argentinars score for policy towards foreign investment improves by the largest amount in the forecast period. This partly reflects the fact that the score and ranking in the historical period were particularly weak; by contrast, Mr Macri is much more welcoming to foreign capital and is working to bring transparency, clarity and predictability to government policy towards foreign investment. Initial progress on starting to lift energy tariffs will make foreign participation more attractive, while the sovereignrs exit from default in April lifts a major constraint on foreign investment by reopening access to investment protection schemes (a key factor driving the increase in Argentinars score in this category during 2016-20). The governmentrs more market-friendly approach means that expropriation risk will fall, as will the likelihood of government favouritism of domestic firms. Despite the new governmentrs more welcoming stance to foreign investment, we expect privatisation to remain off the agenda. The public still places much of the blame for the 2001-02 crisis on the privatisation process of the 1990s, in which foreign firms featured heavily. • Even though several multilaterals have pledged finance and the countryrs exit from default has facilitated access to capital markets, the governmentrs ambitious plans for infrastructure and housing development will necessitate foreign participation in the context of fiscal expenditure constraints and a domestic recession. The government has not officially announced the introduction of a public-private partnership (PPP) framework for investment, but we expect a bill to be submitted in the coming months. Official estimates that it could raise potential capital inflows by US$90bn are likely to prove extremely optimistic (total inward FDI only totalled US$11.7bn in 2015) but the legislation will boost foreign participation in the countryrs infrastructure drive. • Energy policy reforms to liberalise tariffs and promote investment are likely to boost multi-national interest in deals to commercialise Argentinars vast shale oil and gas reserves (the worldrs second-largest). Although recent low oil prices make shale exploration unviable in many countries, the fact that Argentinars domestic oil prices are fixed (currently at US$67.50/barrel) means that some investment in the sector is still likely. Even though the government is likely to align oil prices with market levels, the process is expected to be gradual. After initial investment in the early, more costly, stages of exploration, energy companies are expected to be able to reduce costs, protecting profit margins even if fixed domestic oil prices fall.
Foreign trade and exchange controls
Value of indexa 2011-15 4.6
2016-20 6.4
Global rankb 2011-15 73
2016-20 65
Regional rankc 2011-15 10
2016-20 9
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
An easing of controls is in prospect
Country Forecast August 2016
Mr Macrirs rapid moves to dismantle currency controls upon taking office are the main factor driving the improvement in Argentinars score and ranking in this area. Rather than a steady and gradual process, the government opted for an immediate lifting of controls and simultaneous devaluation of the peso, on the basis that this would provide clarity, transparency and a strong signal of the governmentrs commitment to change. Most export duties were removed and the
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requirement for official authorisation from the tax bureau for all US dollar purchases and profit remittances has been lifted. The move has essentially eliminated the black-market exchange rate, while fears of an uncontrolled unravelling of the peso have been unfounded. Nonetheless, given strong pent-up demand for US dollars (both to remit profits and to pay for imports), and a stillthin reserves cushion by historical standards, there remains a risk of further volatility. • Mr Macrirs closer relations with the new Brazilian interim administration, led by that countryrs interim president, Michel Temer, are likely to facilitate trade liberalisation efforts by the Mercado Común del Sur (Mercosur, the Southern Cone customs union). Mr Macri may seek to advance a long-mooted free-trade agreement (FTA) between Mercosur and the EU, although the EUrs recent difficulties in passing other FTAs augur poorly for an FTA with Mercosur. But an increase in intra-regional trade is possible, if Mercosur seeks an FTA with the Alianza del Pacífico (Pacific Alliance), on which Argentina has observer status. Taxes
Value of indexa 2011-15 4.1
2016-20 4.8
Global rankb 2011-15 80
2016-20 78
Regional rankc 2011-15 12
2016-20 11
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
The tax system will remain complex
Although we expect some improvements in 2016-20, Argentina’s tax system will remain the weakest area of the business environment. Tax policy will become more predictable under the current government, but it will take time to address the systemrs complexity, high costs and inefficiencies. According to the World Bankrs latest Doing Business report (for 2016), in Argentina a medium-sized company takes 405 hours per year to prepare, file and pay its taxes, compared with an OECD average of 177 hours, and pays a total tax rate (including labour contributions) of 137% of profits (the OECD average is 41%). Under Mr Macri, a reduction and eventual elimination of the most distortionary taxes, such as agricultural export taxes, will be likely. But a broadand politically difficult reform to increase the consistency and equity of the system (which has been distorted by a decentralisation of expenditure to the provinces and a centralisation of revenue to the central government) has long been put off and remains extremely unlikely to be addressed in the forecast period. As a result, tax evasion and informality will remain high. • Reforms to the system of revenue-sharing with the provinces are badly needed to secure the stability of the tax system, but continued delays on a comprehensive reform can be expected, given Mr Macrirs need to expend political capital on major macroeconomic adjustments. In the absence of reform, the executive has instead undertaken a series of rollovers of provincial debt several times since 2010. Until the problems in the system of revenue-sharing with the provinces are addressed, weaknesses in the provincial finances will sustain the need for further central government bail-outs and therefore raise the risk of periodic ad hoc measures at the national level to increase tax revenue.
Country Forecast August 2016
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• The Macri government has passed several tax measures to improve conditions for small and medium-sized enterprises (SMEs) who have been particularly badly hit by deteriorating economic conditions. From 2017, SMEs will be exempt from the minimum notional income tax levied on companiesr assets. This tax accounts for a very small share of total tax revenue (0.2% in 2015), but is burdensome for SMEs (particularly for manufacturing companies who generally have more assets in the form of equipment than service providers), as it must be paid even in the event of losses. In addition, SMEs will be able to offset bank debit and credit tax against income tax. SMEs will also be able to pay value-added tax (VAT) on sales every three months, which will assist with cashflow. Finally, to encourage investment, the law offsets up to 10% of new investments in capital goods and infrastructure against income tax. Financing
Value of indexa 2011-15 4.0
2016-20 6.3
Global rankb 2011-15 72
2016-20 53
Regional rankc 2011-15 8
2016-20 5
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Argentinars score and ranking for financing improve sharply in the forecast period, reflecting an easing in corporate financing constraints now that Argentina has exited default. Yet although we envisage an improvement in conditions for foreign companies operating in Argentina, long-term credit lines will still be restrictedparticularly for SMEsby structural constraints, including the banking sectorrs weak deposit base (a legacy of the 2001-02 crisis). Mediumand long-term credit for domestic business is therefore likely to remain scarce until late in the forecast period. Large foreign companies will continue to meet most of their financing needs through external sources. Banking sector regulation and supervision are expected to be reasonable, while financial soundness and profitability indicators will remain solid. However, some weaknesses in the system persist, including shallow financial markets and low levels of banking penetration. • Domestic capital markets will remain underdeveloped by regional and particularly global comparison. The nationalisation of private pension funds in 2008 was a serious blow to their growth and has had a lasting impact. Argentina’s private pension-fund administrators were the country’s most important institutional investors and were a growing source of finance in the local capital markets. Under current regulations, the Administración Nacional de Seguridad Social (Anses, the social security agency, which took over the nationalised pension fund assets) is able to allocate up to 50% of assets in local private companies’ shares and up to 10% of assets in foreign government securities. Although reforms are likely and the Macri government is unlikely to use the Anses funds to finance government investment, as his predecessor did, the changes will take time to bear fruit, and growth with be from a very low base: stockmarket capitalisation was just 12% of GDP in March 2016. The stockmarket is currently very shallow, with ten companies accounting for around 95% of total market capitalisation, and undiversified.
Country Forecast August 2016
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The labour market
Value of indexa 2011-15 5.7
2016-20 5.9
Global rankb 2011-15 55
2016-20 59
Regional rankc 2011-15 6
2016-20 6
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
Labour market reforms unlikely
Although we do not expect a sharp improvement in the labour market in 2016-20, the relatively well-educated, productive and flexible labour force has long been an asset to the countryrs business environment (and made the labour market one of Argentinars highest-ranking categories in the historical period). The fact that we do not expect significant improvements (indeed, Argentinars global ranking is expected to fall in 2016-20) reflects the political difficulty of securing support for reforms to simplify labour regulations and addressing the highly unionised labour market that produces a high incidence of strikes. It also reflects the assumption that the Macri government will focus on addressing macroeconomic distortions before moving on to more difficult structural reforms in areas like labour markets. In the short term, difficult economic adjustments that will produce a decline in real wages and a reduction in purchasing power will translate into a high level of strikes (notably in public services such as transport and education), led by politically powerful trade union leaders. Mr Macri faces a tough task in tackling union power, and we expect little progress on reducing the extent of wage and other labour-market regulation. • Skills shortages and mismatches have become more of a problem for business in the past decade, compounded by a lack of effective training programmes in both the public and private sectors. Secondary and tertiary enrollment are very high by regional standards, but educational outcomes are not as strong as would be expected given these rates, and vary widely by province. At the same time, access to job training tends to be unequal and informal.
Infrastructure
Value of indexa 2011-15 7.0
2016-20 7.0
Global rankb 2011-15 36
2016-20 42
Regional rankc 2011-15 2
2016-20 2
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.
More private investment to upgrade infrastructure
Country Forecast August 2016
Infrastructure remains Argentinars highest-ranking area of the business environment, although its global ranking slips slightly as other similarly-scoring countries make more progress. The country boasts a well-developed telecoms network, as well as relatively low property rental costs. However, physical infrastructure has suffered over the past decade from a lack of investment. We currently assume that Argentinars exit from default, PPP legislation and improvements in contract rights will help to boost investment both in transport infrastructure and energy. However, such projects will take time to come on stream, explaining Argentinars unchanged score in 2016-20, raising the risk that infrastructure bottlenecks will continue to hamper growth in the meantime.
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• The risk of energy shortages will persist in the short term at least, given long project completion times. Demand for electricity and gas has soared in the past decade, but as tariffs for residential and business consumers are lifted, demand growth is expected to slow. Some major projects have recently been completed, including hydroelectric projects at Yacyretá and Caracoles, and a third nuclear plant, Atucha II. Argentina signed a memorandum of understanding (MOU) with China in July 2016 reaffirming a 2015 agreement to construct a fourth and fifth nuclear reactor in Argentina, with construction on the fourth reactor expected to start in early 2017 and the fifth by 2019. Aside from this, prospects are less certain. Despite Argentina’s vast hydroelectric potential, no further large projects are under way. The government is preparing to auction 1GW in the renewables sector later in 2016, but successful bids are unlikely to translate into new capacity until late in the forecast period (or even after), particularly given that the renewables sector is at a much earlier stage of development than in other countries in the region. In the short term at least, the lack of new energy capacity coming on stream will maintain dependence on imports, and increase exposure to weather-related problems at existing hydropower facilities.
Country Forecast August 2016
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Economic forecast Policy trends
The Macri administration has made good progress on a programme of economic adjustment intended to put the economy on a sounder footing, but much remains to be done. The government moved quickly to remove foreignexchange controls, allowing the peso to devalue by 30% on taking office in December 2015. It also raised interest rates sharply, and rapidly reduced agricultural export duties (to boost exports), and costly energy and transport subsidies (producing fiscal savings and introducing more market-based rates. which should support fresh investment). However, perhaps most important has been the governmentrs success in agreeing terms with holdout creditors and exiting default. An end to default will allow access to fresh international credit and reduce inflationary monetisation of fiscal deficits. It also sent a strong signal of the governmentrs commitment to policy reform, after years of discretionary interventionism under the former government. The governmentrs attention will now turn to the reduction of inflation, which is another key condition for a recovery in private consumption and investment. Tight monetary policy will be supportive of disinflation, but reductions of the fiscal deficit and wage growth will also be required, and these will be politically difficult. The government has repeatedly stated its commitment to reducing the deficit and containing inflation, and our baseline forecast assumes that there will be progress in both areas. This should allow disinflation to gather pace from 2017, a process that will ultimately boost investor confidence. However, there are substantial risks to this assumption, as adjustment is taking place amid a post-devaluation inflationary spike that will test the patience of voters and unions, and raise expenditure pressures. Moreover, under any scenario, certain aspects of the policymaking environment will remain tricky, with progress on labour-market reform (to improve flexibility) or comprehensive fiscal and tax reform (to reduce costs and complexity) unlikely in the medium term.
Fiscal policy
Fiscal indicators (% of GDP) Government expenditure Government revenue Budget balance Government debt
Public debt (% of GDP) 60.0 55.0 50.0 45.0 40.0
19
Source: The Economist Intelligence Unit.
Country Forecast August 2016
20
17
18
16
14
15
12
13
30.0
2011
35.0
2015 27.5 22.7 -4.8 50.1
2016 27.0 22.1 -4.9 53.8
2017 26.9 22.6 -4.3 51.3
2018 26.1 23.1 -3.0 50.6
2019 26.0 23.2 -2.8 50.4
2020 25.6 23.2 -2.4 50.2
Fiscal tightening is on the cards, but adjustment will be gradual, and it will take several years to restore the primary balance to surplus. The government has taken some important steps to narrow the deficit, particularly by reducing costly electricity subsidies and the public-sector payroll. However, considering the impact of recently announced income-tax breaks and increased transfers, we expect the non-financial public-sector deficit to remain essentially unchanged as a percentage of GDP in 2016, at 4.9% of GDP. (Methodology changes make year-on-year comparisons difficult, but data for the first half of 2016 show real cuts in operational and capital expenditure, helping to offset the burden of rising social security payments and weak tax revenue, and suggest that the government is on track for a deficit under 5% of GDP). We expect better
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progress thereafter, bringing the fiscal deficit down to a more manageable level of 3% of GDP in 2017-20 and eliminating the primary deficit by the end of the forecast period. These forecasts rest on the assumption that expenditure will be cut by around 1.5% of GDP between 2016 and 2020 (reflecting a smaller publicsector workforce, a further drop in subsidies and a reduction in the deficit of state companies), and that revenue will grow by 0.5% of GDP (assuming that recent tax cuts are more than offset by a pick-up in trade). In the aftermath of the holdout deal and, assuming that there is progress on deficit-reduction, the Macri governmentrs ability to finance moderate deficits without resorting to inflationary money printing will be much improved. A moderate public debt/GDP ratio (and low levels of external indebtedness), combined with the attractiveness of Argentinars still-high yields amid abundant global liquidity, should facilitate fresh international bond issuance in the forecast period, after the landmark US$16.5bn sovereign issue in April. Monetary policy
Interest rates (%) Prime lending rate (av) Deposit rate (av)
2015 24.9 21.2
2016 31.2 25.5
2017 24.5 18.9
2018 15.5 10.0
2019 11.3 5.9
2020 10.2 4.8
Although monetary easing has begun after the sharp rise in interest rates following the currency devaluation at the start of the Macri administration, nominal interest rates are likely to remain high for some time to help to bring down inflation. Between April and July the Banco Central de la República Argentina (BCRA, the Central Bank) lowered rates steadily from 38% to 30.25%. Reflecting the impact of recent moderate currency depreciation, and still-high inflation, we believe that the pace of easing will now slow until mid-2017, but still expect the target rate to approach 20% by end-2017. In the medium term, the BCRA has made it clear that it will prioritise a monetary policy that is consistent with a reduction of inflation (it is due to introduce a formal inflationtargeting framework from 2017), and our forecasts assume moderately positive real interest rates consistent with a deepening of credit and the development of long-term lending. International assumptions Economic growth (%) US GDP OECD GDP World GDP World trade Inflation indicators (% unless otherwise indicated) US CPI OECD CPI Soya beans (measured in US$) Oil (Brent; US$/b) Non-oil commodities (measured in US$)
Country Forecast August 2016
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2015
2016
2017
2018
2019
2020
2.4 2.0 2.4 2.7
1.8 1.7 2.2 2.5
2.2 1.6 2.4 3.2
2.3 1.9 2.6 3.4
1.1 1.3 2.1 2.5
2.1 1.8 2.5 3.2
0.1 0.5 -24.2 52.4
1.3 1.0 2.4 40.3
2.2 1.8 5.4 52.5
2.3 1.9 3.9 65.0
1.3 1.5 -1.4 62.4
1.7 1.8 -1.2 61.4
-17.3
-5.1
4.7
4.3
-2.6
-1.0
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Financial variables US$ 3-month commercial paper rate (av; %) Exchange rate Ps:US$ (av)
Economic growth
Contribution to real GDP growth (% points) Private consumption Government consumption Gross fixed investment External balance 8.0 6.0
% GDP Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services Domestic demand Agriculture Industry Services
2015
2016
2017
2018
2019
2020
0.2 9.23
0.5 14.92
0.8 17.13
1.4 18.81
1.5 20.39
1.0 21.77
2015 2.4 5.0 6.7 5.5 -0.4 5.5 3.7 6.5 1.1 2.4
2016 -1.2 -1.3 -0.7 2.0 3.6 5.4 -0.5 3.2 1.7 -3.4
2017 2.7 2.8 1.4 7.6 3.8 6.5 3.5 6.0 2.0 2.6
2018 4.0 4.2 1.4 6.9 4.0 5.6 4.4 6.0 3.5 3.9
2019 3.2 3.6 3.4 4.4 3.3 4.9 3.7 6.0 3.5 2.6
2020 3.4 3.7 2.8 4.5 3.8 6.0 4.0 6.0 3.5 2.9
4.0 2.0 0.0 -2.0
19
20
17
18
16
14
15
12
13
-6.0
2011
-4.0
Source: The Economist Intelligence Unit.
Investment (% of GDP) 17.5 17.0 16.5 16.0
19
Source: The Economist Intelligence Unit.
Country Forecast August 2016
20
18
17
16
14
15
13
12
15.0
2011
15.5
Notwithstanding efforts this year by the statistics agency to revise economic data, key indicators of economic performance remain unavailable or incomplete, complicating our economic forecasting for 2016 and beyond. Those data that are available, including trade, construction and industrial production data, suggest that activity remained subdued in the second quarter, amid contractionary domestic policy and strong external headwinds in the form of weak commodity prices and continued recession Brazil. Our forecasts continue to assume that, after sequential contractions in the first and second quarter, activity will turn marginally positive from the third quarter (when we project that activity in Brazil will also turn positive). Combined, this will result in a contraction of 1.2% in 2016, but will set the stage for growth of 2.7% in 2016, 4% in 2017 and an annual average 3.5% in 2018-20. A few data points are already suggestive of an incipient recovery, including cement shipments, building permit data and consumer confidence surveys, which registered an improvement in July. We assume that policy tightening, along with peso adjustment, will eventually have some beneficial impact on net exports. Efforts will also be made by the Macri government to address the problem of legal and regulatory uncertainty, which should set the stage for renewed strong growth in fixed investment and private consumption, supporting an acceleration of GDP growth. There are downside risks to our GDP forecasts, as attempts by the government to reduce economic distortions and engineer a relatively smooth adjustment to a lowerinflation environment could prove extremely challenging, keeping both consumption and investment subdued for longer than we expect. There is also some upside risk, however, as investment could take off beyond expectations from 2017 once the gains from macroeconomic adjustment materialise and assuming that efforts to restore confidence in the rule of law and improve the framework for doing business continue to make progress. However, even in this scenario, in the absence of deeper structural reform efforts than we currently envisage, the potential growth rate will remain closer to 3% than to 4%.
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Argentina
Sectoral trends
Better incentives should boost key sectors
Agriculture will continue to be a key contributor to the Argentinian economy. Although it has accounted for around 10% of GDP over the past decade, and for around 20% of private employment, these figures underestimate its contribution, as they do not include agro-industry. Weak soft commodity prices relative to the boom years of the commodities supercycle will have some dampening impact on agriculture. However, we believe that a more important factor in the sectorrs growth prospects will be the recent easing of export taxes and quotas by the Macri administration earlier this year. This follows a period of ever-tightening controls implemented by the administration of the former president, Cristina Ferández de Kirchner (2007-15), to keep domestic prices low, which ultimately restricted profitability and hence output. A more stable, clear and attractive environment for agriculture producers will boost output. It will also support agroindustry (including the processing of Argentinars key crop, soybeans) and bolster a manufacturing sector that is currently struggling amid weak demand both at home and in Brazil. The Economist Intelligence Unit does expect a mild recovery in Brazil in 2017-20, which will also help to produce a moderate pick-up in manufacturing over the course of 2016-20. Mining and energy are two sectors with great potential. Argentina has vast shale and gas resources, but, to date, commercialising them has proven difficult following the nationalisation of the country’s largest energy company, YPF, in 2012. The Macri administration has started to tackle some of the main problems constraining investment, which, apart from a lack of confidence in rule of law, include price controls that keep gas prices well below the international market price. However, rapid tariff adjustments earlier this year have proven politically unpopular and some uncertainty over whether the government will be forced by the courts to backtrack will serve to undermine investment in the short term. In this context, we do not expect investment in this sector to accelerate until late in 2017. Until recently, metal mining was considered a comparatively bright spot in the economy and a key source of FDI, owing to a relatively favourable regulatory regime. However, high labour and other input costs, combined with difficulty in accessing foreign exchange and a less favourable international price environment have restricted metal-mining activity in the past few years. It will take some time to reduce local costs, and a sharp rebound in international prices is not on the cards; in this environment the short-term outlook for the mining sector is not promising. However, assuming that macroeconomic adjustments eventually improve relative prices, mining activity remains likely to pick up moderately in the medium term. The services sector will, in the short term, be constrained by a decline of private consumption in the face of falling real wages and employment. Certain sectors will be more immune to these effects, including financial services, healthcare and communications. However, wholesale and retail trade, hotels and restaurants, and transport services will all suffer in 2016 from the effects of low consumer spending and weak external trade, before picking up as the forecast period progresses in line with our forecasts for private consumption and personal disposable incomes.
Country Forecast August 2016
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Inflation
% Consumer prices Average wages Real wages Unit labour costs Labour costs per hour (US$)
2015 26.5 29.9 2.7 12.6 5.9
2016 42.8 29.0 -9.6 -17.6 4.7
2017 23.5 23.7 0.2 7.6 5.1
2018 13.6 14.4 0.7 2.6 5.3
2019 9.4 11.2 1.6 1.8 5.4
2020 7.9 9.3 1.3 1.4 5.6
The Macri government is committed to improving the accuracy of official inflation data and, after a review process lasting several months, has introduced a new national consumer price index, which showed prices rising by 4.2% in May and 3.1% in June. For now, reflecting a lack of historical data to provide a full picture of 12-month inflation trends, we are using the Buenos Aires consumer price index as a proxy for inflation at the national level. The Buenos Aires index showed 12-month inflation at 47.1% in June, reflecting currency and tariff adjustments by the new administration. Assuming tight fiscal and monetary policy, the inflationary spike will prove transitory. We therefore expect gradual disinflation in the medium term, provided that domestic demand remains subdued (relative to the boom years of 2004-11) and domestic supply strengthens on the back of improvements in microeconomic policy. The main risks to this forecast stem from any failure to tighten fiscal policy as projected, a weaker than expected peso and the difficult process of reining in nominal wage growth. However, in the medium term there is also the potential for inflation to fall more rapidly than we currently project, depending on the effectiveness of the Macri administrationrs efforts to address the high level of wage indexation and restore operational independence to the Central Bank. Exchange rates
2015 Exchange rate Ps:US$ (av) 9.233 Exchange rate Ps:US$ (end-period) 13.100 Exchange rate Ps:¥100 (av) 523.8 Real effective exchange rate index (1997=100; av) 82.0 Purchasing power parity Ps:US$ (av) 6.21
2016 14.921 16.199 827.9
2017 17.128 17.978 939.2
2018 18.815 19.662 1072.6
2019 20.390 21.124 1180.6
2020 21.772 22.407 1274.6
73.7 8.27
78.4 10.13
78.6 11.27
77.1 12.22
75.7 13.07
Some renewed depreciation pressure related to Brexit (the UKrs decision to leave the EU) brought the peso to Ps15:US$1 at the end of July, from around Ps14:US$1 at mid-year, and we expect further moderate real weakening over the forecast period as interest rates continue to decline and economic recovery draws in imports. There remains a possibility of some volatility as the new monetary authorities grapple with the introduction of the (more or less) free float and the elimination of controls. However, the positive outlook for portfolio and foreign direct investment inflows will be supportive of the currency during the outlook period. On balance, we expect the peso to end 2016 at Ps16.2:US$1 and to end 2020 at Ps22.4:US$1. This adjustment will help to reverse the accumulated real appreciation of the peso over the past five years, which has eroded external competitiveness.
Country Forecast August 2016
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Argentina
External sector
External balances (% of GDP) Current-account balance Trade balance Inward FDI flow
3.0 2.0 1.0 0.0 -1.0
19
Source: The Economist Intelligence Unit.
20
17
18
16
14
15
12
13
-3.0
2011
-2.0
US$ bn Current-account balance Current-account balance (% of GDP) Goods: exports fob Goods: imports fob Trade balance Services: credit Services: debit Services balance Primary income: credit Primary income: debit Primary income balance Secondary income: credit Secondary income: debit Secondary income balance
2015 -15.9
2016 -14.3
2017 -14.1
2018 -13.2
2019 -14.2
2020 -14.8
-2.5 56.8 -57.2 -0.4 13.9 -17.8 -3.9 2.3 -13.6 -11.3 1.9 -2.3 -0.4
-2.7 58.4 -57.2 1.2 14.1 -18.3 -4.2 2.5 -13.4 -10.8 1.6 -2.0 -0.4
-2.4 64.6 -63.1 1.5 15.1 -19.2 -4.1 3.0 -14.0 -11.1 1.8 -2.2 -0.5
-2.1 72.4 -69.6 2.8 16.1 -20.7 -4.6 3.4 -14.4 -10.9 1.9 -2.4 -0.5
-2.2 78.2 -75.5 2.7 16.6 -22.0 -5.4 3.8 -15.1 -11.3 2.3 -2.6 -0.3
-2.1 85.5 -82.4 3.0 17.2 -23.5 -6.2 4.1 -15.3 -11.1 2.5 -2.9 -0.4
The current-account deficit will continue to widen in the short term, to a peak of 2.7% of GDP this year, partly reflecting an increase in outward profit remittances following the removal of controls. However, currency adjustment should gradually bolster the current account as a weaker peso starts to boost goods and services exports, and the terms of trade improve. On this basis, we expect the current-account deficit to narrow from 2017. We also expect the countryrs ability to finance moderate current-account deficits to improve substantially over the forecast period, assuming that capital inflows pick up from 2016-17 as investor confidence in the Macri administration grows. The result will be a rise in foreign reserves.
Foreign direct investment in Argentina Stocks and flows During the 1990s foreign direct investment (FDI) inflows to Argentina increased substantially, reflecting a privatisation programme and acquisitions of domestic private firms. This brought FDI inflows to an annual average 3.7% of GDP in 1995-2000, which was followed by a collapse in inward FDI to 1.4% of GDP in 2001-03, reflecting Argentina’s default and subsequent deep recession. Devaluation stimulated solid inflows of inward FDI in subsequent years, with inflows averaging 3.7% of GDP in 2003-08. Since then, however, FDI inflows have weakened, from 3% of GDP in 2008 to an annual average 1.6% of GDP in 2009-14. Growing concerns about the strength and predictability of the legal and regulatory environment held back FDI inflows during the administration of the former president, Cristina Fernández de Kirchner (2007-15). The inward FDI stock was US$94bn (15% of GDP) in 2015 and the outward stock of FDI was US$37bn (6% of GDP).
Origin and distribution Spanish firms account for slightly under one-third of the stock of FDI, followed by US firms with close to 20%. Dutch, Chilean and Brazilian companies account for around 5% each, but anecdotal evidence suggests that Brazilian inflows are rising more quickly than those from elsewhere. Spanish firms have invested in privatised utilities, banking and energy. European firms in the utilities and banking sectors were hit hard by the 2001-02 crisis. As many companies disinvested after the crisis, firms from Brazil, Mexico and Chile bought up cheap assets. In 2013 the largest foreign direct investor in Argentina, by some distance, was the US. The potential for an influx of Chinese FDI is thought to be great. However, the latest local-source data on FDI inflows into Argentina by country show that, of US$12.2bn in total inflows in 2014, just US$105m came from China.
Country Forecast August 2016
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Determinants FDI into Argentina is quite broadly spread; oil accounts for one-quarter of the stock, followed by chemicals, automotive, metal minerals and telecommunications, although in recent years almost half of FDI inflows have gone into manufacturing, and a further quarter into mining. Historically, Argentina has attracted investors hoping to take advantage of a relatively affluent and protected domestic market. During the 1990s, and as a result of rapid trade liberalisation, domestic market-seeking investment focused on sectors that showed comparative (or even absolute) advantages or were naturally protected from foreign competition (non-tradeable services, such as utilities). Efficiency-seeking investments have been less common, and have been mainly limited to the automotive industry, where government incentives have been in place for over a decade. Since devaluation, FDI has been attracted by the real exchange rate. Recent FDI in services (including information technology, or IT) has been attracted by Argentina’s skilled workforce and relatively low wages.
Impact The presence of foreign subsidiaries has brought positive spillovers (both within and across industries) in manufacturing, but only in sectors where domestic firms have proven sufficiently adaptable. In other cases, increased competition from foreign investors, or a preference on the part of the latter for foreign suppliers, has damaged local firms. Telecoms is one example of a sector where the quality of service and technology has been transformed by foreign investment. Foreign investors own most of the privatised utilities. After the 2001-02 maxi-devaluation, which in effect broke the terms of their contracts (and after the government declined to renegotiate), investment declined. The contribution of foreign firms to local research and development activities has been limited, as technical progress has been mainly embodied by imported capital goods and turnkey plants. Foreign firms account for a large share of Argentina’s exports.
Potential The major attractions for FDI will be a growing and relatively high-income domestic market, strong natural-resource endowments and, to a lesser extent, Argentina’s potential as a manufacturing base. A relatively large pool of skilled human capital and a large stock of natural resources constitute Argentina’s long-term advantages. In the short term, Argentinars exit from default in April 2016 could also act as a spur to FDI inflows, by facilitating investor access to investment guarantees and trade finance, which has until recently been lacking.
Country Forecast August 2016
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Argentina
Market opportunities Market outlook
2015 Population (m) 43.1 GDP (US$ bn at market exchange rates) 632.2 GDP per head (US$ at market exchange rates) 14,657 GDP (US$ bn at PPP) 940.1 GDP per head (US$ at PPP) 21,795 Personal disposable income (US$ bn) 0.4 Median household income (US$) 25,144 Household consumption (US$ bn) 416.2 Household consumption per head (US$) 9,650 Exports of goods & services (% change) -0.4 Imports of goods & services (% change) 5.5
2016 43.6
2017 44.0
2018 44.5
2019 44.9
2020 45.4
524.2
585.2
629.2
659.2
693.7
12,026 945.9 21,701 0.4 27,721 333.8
13,286 989.8 22,472 0.4 21,411 374.5
14,141 1,050.5 23,609 0.4 23,410 402.0
14,670 1,100.0 24,479 0.5 24,912 421.6
15,287 1,155.9 25,474 0.5 25,871 439.0
7,660
8,500
9,030
9,380
9,680
3.6
3.8
4.0
3.3
3.8
5.4
6.5
5.6
4.9
6.0
Argentina’s wealth of natural resources, large domestic market with high perhead incomes relative to much of the rest of the region, and proximity and preferential access to the large Brazilian market represent attractive long-term opportunities for foreign investors. However, a difficult economic adjustment to rein in inflation has deterred investment this year, with businesses waiting on the sidelines to ensure that the president, Mauricio Macri, has the political capital to push through difficult adjustments. The Economist Intelligence Unitrs forecast of a shift to solid GDP growth rates of an average 3.5% in 2018-20, and an improvement in the environment for business, suggests an increase in domestic market opportunities in the medium term. Some improvement in purchasing power expected
Country Forecast August 2016
Argentina is a middle-income country with one of the highest levels of GDP per head in the regionUS$21,795 at purchasing power parity (PPP) exchange rates in 2015. Demographics are generally supportive of growth: the population is estimated at around 43m (the fourth-largest in Latin America), and is relatively young, albeit not as young as that of most other countries in the region. Moreover, urbanisation is high, at more than 90% of the population. However, as in much of the region, income inequality and poverty remain relatively high. This is not reflected in official poverty statistics, which were widely discredited and have not been published since 2013. The Instituto Nacional de Estadística y Censos (INDEC, the national statistics institute) is currently working on putting together new surveys; in the meantime, the most reliable data comes from the Universidad Católica Argentina, the country’s leading independent university, which put the poverty rate at 28.7% in 2014. High rates of poverty and income inequality will continue to restrict purchasing power in 2016-20, although there should be some improvement as the forecast period progresses, assuming solid GDP growth rates and improving access to consumer credit.
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Consumer expenditure US$ m Food, beverages & tobacco Housing & household fuels Clothing & footwear Household goods & services Health Transport & communications Leisure & education Other Total % of total Food, beverages & tobacco Housing & household fuels Clothing & footwear Household goods & services Health Transport & communications Leisure & education Other
2015
2016
2017
2018
2019
2020
155,349 50,329 30,521 19,812 23,740 70,536 39,399 26,482 416,168
124,258 41,031 24,842 16,057 19,264 55,722 31,684 20,899 333,757
139,002 45,637 28,815 18,195 21,438 62,331 35,506 23,562 374,486
148,285 48,766 31,609 19,602 22,977 67,163 38,150 25,400 401,951
154,364 51,072 33,733 20,601 24,149 70,850 40,105 26,732 421,607
159,186 53,021 35,655 21,445 25,174 74,845 41,804 27,905 439,034
37.3 12.1 7.3 4.8 5.7 16.9 9.5 6.4
37.2 12.3 7.4 4.8 5.8 16.7 9.5 6.3
37.1 12.2 7.7 4.9 5.7 16.6 9.5 6.3
36.9 12.1 7.9 4.9 5.7 16.7 9.5 6.3
36.6 12.1 8.0 4.9 5.7 16.8 9.5 6.3
36.3 12.1 8.1 4.9 5.7 17.0 9.5 6.4
A long-term shift in consumer attitudes was brought about by the economic crisis of 2001-02, which changed patterns of goods consumption markedly. A shift towards cheaper brands and lower-cost, high-volume outlets was not reversed even during the boom years of 2004-07. However, we expect the proportion of income spent on food, beverages and tobacco to fall gradually in the forecast period, and for the proportion of consumer spending on hotels and restaurants, healthcare, leisure and education to grow. This assumes growth in purchasing power as real disposable incomes rise over the course of the forecast period, driven by growth in employment, income redistribution via Argentina’s relatively new conditional cash transfer schemes, and greater efforts at financial inclusion, which suggest a steady increase in access to bank credit during the forecast period. One difference between Argentina and the rest of the region will be the age of the population. Argentina’s population will remain markedly older; just over 11% were aged 65 years and over in 2015. This will affect consumption patterns, notably pushing up overall expenditure on healthcare.
Country Forecast August 2016
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Argentina
Social indicators and living standards
Health Healthcare spending (% of GDP) Healthcare spending (US$ per head) Infant mortality rate (per 1,000 live births) Physicians (per 1,000 population) Food and beverages Food, beverages & tobacco (% of household spending) Meat consumption (kg per person) Milk consumption (litres per person) Coffee & tea consumption (kg per person) Consumer goods in use (per 1,000 population) Passenger cars Telephone main lines Mobile phone subscribers Television sets Personal computers Households No. of households (m) No. of people per household (av) Income and income distribution Median household income (US$) Average monthly wage (US$) Gini coefficient Share of household income (%): lowest 20% highest 20% highest 10% top 20%/bottom 20% ratio
2015 Argentina
Latin America (av)
2020 Argentina
Latin America (av)
4.8 676 9.7 3.9
7.8 757 15.3 2.2
5.1 699 8.7 4.1
8.1 806 13.2 2.5
37.3 96.8 198.0 7.2
37.3 80.7 138.3 3.7
36.3 96.6 202.9 7.3
36.8 83.1 140.6 3.7
196 207 1,450 400 587
186 155 1,189 590 44
202 168 1658 413 1006
201 113 1,332 680 53
11.6 3.7
124.6 3.8
12.3 3.7
130.8 3.8
27,721 49 42.3 a
17,613 585 52.8 a
26,856 49 –
17,787 – –
38.2 a 17.8 a
3.0 a 58.4 a 42.2 a 19.9 a
– – – –
– – – –
a a
a Latest available year. Sources: UN Statistical Office; World Bank; Food and Agriculture Organisation (FAO); Euromonitor; World Health Organisation (WHO); national statistical offices; Pyramid Research; Economist Intelligence Unit estimates and forecasts.
Country Forecast August 2016
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Long-term outlook The long-term outlook Population and labour force (% change; annual av) Total population Working-age population Working-age minus total population Labour force Growth and productivity (% change; annual av) Growth of real GDP per head Growth of real GDP Labour productivity growth Growth of capital stock Total factor productivity growth
Abundant natural resources and a skilled labour force underpin potential
2015-30
2031-50
2015-50
0.90 0.94 0.07 1.34
0.58 0.45 -0.13 0.59
0.72 0.67 -0.04 0.92
1.9 2.9 1.5 3.3 0.8
2.2 2.8 2.2 2.9 1.4
2.1 2.8 1.9 3.1 1.1
Argentina has historically been susceptible to cycles of boom and bust, reflecting both a vulnerability to external conditions and domestic policy challenges. The Economist Intelligence Unitrs long-term growth forecast rests on the assumption that Argentina will adopt a more sustainable economic model that reduces fiscal and external imbalances, allowing the economy to grow by an average of 2.8% in 2015-50. The risks to this forecast will be both exogenous (falling commodity prices, or a sharp drop in capital flows to emerging markets) and policy-related. Initial conditions: Argentina’s GDP per head of US$14,657 in 2015 (US$21,795 at purchasing power parityPPP) is one of the highest in the region. However, as it is still only one-third of the US figure, there is clearly potential for Argentina to catch up to developed-country levels. The internal market is relatively large and, although the territory is extensive, there are few internal geographical obstacles, although Argentina is distant from developed-country markets and high transport costs will place an extra burden on exporters. For a decade after the 2001 maxi-devaluation, labour was cheaper than during the 1990s, but the gains from devaluation had been eliminated by 2012 amid high inflation and sustained real wage growth. Despite two decades of gradual deindustrialisation, Argentina retains a solid skilled labour base and some capacity to carry out high-level research and development. It will attract manufacturing investment, but its competitiveness as a global manufacturing centre will lag Asian rivals. Argentina has strong comparative advantages in agriculture, although, as a commodity producer, it will face more volatile terms of trade than Asian competitors. This means that growth is likely to be uneven. Demographic trends: Argentina shares demographic as well as cultural features with Europe. The average age of the population is higher than in most of the rest of the region and population growth both in percentage and absolute terms is expected to be slightly lower. We expect population growth of 0.7% per year in 2015-50, less than half the average recorded in 1980-2000. At present, the working-age population is still growing faster than the overall population, but we expect this trend to change from around 2030. Although labour force participation rates will continue to rise gradually towards OECD levels, from an estimated 64% in 2020, growth in the labour force will slow as a result. Particularly towards the end of the long-term forecast period, the contribution of labour to GDP will therefore be weaker.
Country Forecast August 2016
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Argentina
The population is more urbanised and better provided with healthcare than in other Latin American countries, leading to a life expectancy of around 76 years, similar to that of many developed countries. Given the existence of the welfare state and the severe weakening of the finances of the state and private pensions systems in the past two decades, the growing elderly population will increasingly generate strains on the public finances. External conditions: Growth-determining factors exogenous to Argentina will include the level of developed-country interest rates (in the past this has been strongly correlated with the volume of capital flows into Latin America and has had a major impact on growth), and commodity prices. Argentina will remain highly dependent on income from exports of agricultural commodities to provide an investible surplus for deployment elsewhere in the economy. Restricted access to finance since the 2001 default has raised the cost of capital in the past decade by forcing reliance on financing from the shallow, more expensive domestic market. However, Argentinars exit from default in April 2016 implies improved access to international capital markets to facilitate stronger growth in investment, particularly in agriculture, energy and infrastructure. Institutional weaknesses will constrain growth
Institutions and policy trends: Disappointing economic outcomes have been the indirect result of shortcomings in policymaking and institutions. Argentina scores moderately to poorly on measures of corruption, security and the rule of law. Our analysis suggests that an improvement in the overall institutional climate would have a significant impact on long-term growth, but institutional reforms will take a long time to bear fruit. The quality of policymaking is likely to improve more rapidly. The government of Cristina Fernández de Kirchner, in office from 2007 to 2015, clashed with foreign investors over the terms of contracts, and oversaw a phase of ad hoc intervention in the economy. A more market-friendly administration led by Mauricio Macri is seeking to address these problems, and we assume that the government will succeed early on in the long-term forecast period in establishing a new framework for foreign investors in sectors such as utilities.
GDP will grow by an annual average of 2.8% in 2015-50
Long-term performance: We forecast that average annual GDP will grow by 2.8% in 2015-50, with the growth rate peaking at 3.1% in 2021-30, before slowing to 3% in 2031-40 and 2.5% by 2041-50. Our forecasts assume that the contribution of capital to growth will be firm in the first part of the forecast period, before tapering off somewhat over the latter part of the outlook period. We also assume that as growth in the working-age population slows, the increase in the availability of labour will slow, as a result of which growth will become more dependent on productivity gains. To the extent that they are achieved, these gains are likely to be made via technology transfer and higher foreign investment. Firms will increasingly look beyond national borders in order to achieve economies of scale, and this will stimulate efficiency gains. Having said this and, although Argentina’s abundant natural resources and relatively strong skills base represent solid economic potential, the country will struggle to achieve the productivity gains needed to converge with developedmarket income levels. This is particularly the case in the light of low levels of domestic investment in research and development, and we expected limited progress in "catch-up" with developed country incomes even in the long-term forecast period.
Country Forecast August 2016
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Income and market size Income and market size Population (m) GDP (US$ bn at market exchange rates) GDP per head (US$ at market exchange rates) Private consumption (US$ bn) Private consumption per head (US$) GDP (US$ bn at PPP) GDP per head (US$ at PPP) Exports of goods & services (US$ bn) Imports of goods & services (US$ bn) Memorandum items GDP per head (at PPP; index, US=100) Share of world population (%) Share of world GDP (% at market exchange rates) Share of world GDP (% at PPP) Share of world exports of goods & services (%)
Country Forecast August 2016
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2015
2030
2050
43.1 632 14,660 416 9,650 940 21,790 70 75
49 1,113 22,620 764 15,520 1,895 38,500 135 192
55 3,347 60,560 2,821 51,040 4,919 88,980 236 797
39.0 0.59 0.82 0.87 0.30
44.5 0.60 0.80 0.87 0.32
60.8 0.60 0.93 0.94 0.19
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Argentina
Methodology for long-term forecasts The time horizon for the detailed forecasts and analysis in the Country Forecast report is a five-year period. The Main report also carries a section on the long-term outlook, including projections of key macroeconomic and market size variables up to 2050. Depending on the indicator, average growth rates in a sub-period or values at select points in time are reported. Many companies make strategic business decisions over timeframes in excess of five years. Our long-term projections will provide information to facilitate such decisions. Long-term forecasts and scenarios are also the key to understanding some of the big economic issues that will shape global business in the coming decades. The Economist Intelligence Unit is well placed to build on and extend the five-year forecasts to produce long-term projections and scenarios because of the existing forward-looking analysis and models in the Country Forecast (in particular, the business environment rankings model). These are used to forecast some of the key drivers of long-run growth, as explained in detail below.
Growth projections The main building blocks for the long-term forecasts of key market and macroeconomic variables are long-run real GDP growth projections. We have estimated growth regressions (based on cross-section, panel data for 86 countries for the 19702000 period) that link real growth in GDP per head to a large set of growth determinants. The sample is split into three decades: 1971-80, 1981-90 and 1991-2000. This gives a maximum of 258 observations (86 countries for each decade); given missing values for some countries and variables, the actual number of observations is 246. The estimation of the pooled, cross-section, panel data is conducted on the basis of a statistical technique called Seemingly Unrelated Regressions. The determinants of growth consist of the scope for convergence (based on initial GDP per worker at the start of a period); demographic variables; a set of policy variables (measuring the fiscal stance, openness to trade, and the government regulatory burden in product, credit and labour markets); a measure of institutional quality; geography (climate, location and the degree of primary export orientation); education levels and labour quality (as measured by mean years of schooling and life expectancy); the external economic environment (changes in the terms of trade); the level of development of information and communications technology (ICT); and historical legacies (history of independent statehood). The regressions, which have high explanatory power for growth, allow us to forecast the long-term growth of real GDP per head for sub-periods up to 2050, on the basis of demographic projections and assumptions about the evolution of policy variables and other drivers of long-term growth.
Definitions of variables The dependent variable is GDPG: Average annual growth in real GDP per head, in the 1970s, 1980s and 1990s, measured at national constant prices.
The independent variables include: LnGDPPL: The natural logarithm of GDP (adjusted for purchasing power parityPPP) per worker (that is, per population aged 15-65) in constant 1980 US dollars at the start of each decade. Expressed as an index, US=1. LnSCHOOL: The natural logarithm of the mean years of schooling of the population aged over 15 at the start of each decade. Missing values for some countries are filled in by estimating mean years of schooling on the basis of an equation relating mean years of schooling (where available) to gross primary school enrolment ten years previously, and to secondary and tertiary enrolment ratios five years previously. LnLIFEEXP: The natural logarithm of life expectancy at birth at the start of each decade. This variable also enters the equation in squared form, reflecting diminishing returns to growth of increases in life expectancy at high levels. OPEN: Updated Sachs-Warner index of opennessthe fraction of years during each decade in which a country is rated as an open economy according to the following four criteria: (1) average tariff rates below 40%; (2) average quota and licensing coverage of imports of less than 40%; (3) a black-market exchange-rate premium that averaged less than 20%; and (4) no extreme controls (taxes, quotas, state monopolies) on exports. INST: Index of institutional quality (on a scale of 1-10) that is an average of five sub-indices of measures of the rule of law, quality of the bureaucracy, corruption, the risk of expropriation and the risk of government repudiation of contracts. Forecast values are based on corresponding indicators from our business environment rankings.
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LABPOP: The difference between the growth rate of the working-age population (aged 15-65) and the growth rate of the total population in each decade in the 1970-2000 period. TOT: The average annual rate of change of the terms of trade in a given decade. GOVSAV: The average government savings ratio in each decade (current government revenue minus current government expenditure) expressed as a share of GDP. TRADESH: The average share of trade (exports and imports of goods and services) in GDP, lagged by one decade to deal with the endogeneity of growth and trade. GOVREG: An index on a scale of 1-10 of regulation of product, credit and labour markets. For forecast periods, the composite index is based on seven indicators from three categories of our business environment rankings modelfrom Policy towards private enterprise (ease of setting up new businesses, freedom to compete, price controls); from Financing (openness of the banking system, financial market distortions); and from Labour markets (restrictiveness of labour laws, wage regulation). Control variables include PRIMARY: Share of the exports of primary products in GDP at the start of a decade; TROPIC: Percentage of the land area within a country that has a tropical climate; COLONY: History of independent statehooda dummy variable taking the value of 1 if a country was a colony before 1945; and, in some specifications, regional dummy variables.
Summary of findings As in other studies, income per head and human capital are found to be important determinants of growth, with the coefficient on the logarithm of GDP per worker suggesting a relatively modest pace of convergence. The measures of institutional quality and of government regulation enter significantly in all specifications. We found a strong positive impact on growth of government savings and openness in all specifications. The criteria for classifying countries as open are quite permissive. The crucial aspect of trade policy captured by the measure is that it is a high level of distortion, rather than modest levels, that is deleterious for growth. The trade share variable is also moderately significant. The openness index (which is more of a true measure of policy) is hardly affected by the inclusion of trade/GDP shares in the equation. The correlation of the two measures is only .26. Although a tropical climate is highly significant, as is the share of primary exports in GDP, other geographic indicatorssuch as access to the sea, distance from major growth centres and the proportion of the population residing near coastlineswere not significant. A colonial past (pre-1945) is found to have a significant negative impact on growth, even in the 1970-2000 period.
Productivity growth The forecasts of GDP growth, of capital stock growth (based on estimated investment shares and assumed depreciation rates) and of growth in labour supply (based on projections of working-age population and assumptions on labour force participation) yield labour productivity growth and total factor productivity growth forecasts. The latter utilise the growth accounting identity, GY=b*GK+c*GL+A, where GY is growth of real GDP, GK growth of the capital stock and GL growth of human capital (the labour force adjusted for changes in skills). “A” stands for growth in total factor productivity; “b” and “c” are the shares of capital and labour in income. Trade values are forecast on the basis of simple import (function of GDP and relative prices) and export functions. Forecast market exchange rates (that is, the differential between PPP and market exchange rates) depend on the differential in labour productivity growth between a country and the US.
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Argentina
Data summary Global outlook
2011 a
International assumptions (%) World GDP growth 2.8 US GDP growth 1.6 Latin America GDP growth 4.7 World trade growth 7.1 US CPI 3.1 EU28 CPI 2.7 Industrial raw materials export price 21.7 Oil price (Brent; US$/b) 110.9 US$ 3-month commercial paper rate 0.2 US$:€ (av) 1.39 ¥:€ (av) 110.94
2012 a 2.2 2.2 3.1 3.4 2.1 2.3 -19.4 112.0 0.2 1.29 102.61
2013 a 2.2 1.5 2.9 3.8 1.5 1.4 -6.8 108.9 0.1 1.33 129.58
2014 a 2.5 2.4 1.3 4.1 1.6 0.5 -5.1 98.9 0.1 1.33 140.67
2015 b 2.4 2.4 0.1 2.7 0.1 0.0 -15.2 52.4 0.2 1.11 134.28
2016 c 2.2 1.8 -0.3 2.5 1.3 0.3 -6.8 40.3 0.5 1.09 118.23
2017 c 2.4 2.2 1.9 3.2 2.2 1.2 7.9 52.5 0.8 1.07 111.16
2018 c 2.6 2.3 2.8 3.4 2.3 1.4 4.7 65.0 1.4 1.12 119.31
2019 c 2.1 1.1 2.9 2.5 1.3 1.4 -5.2 62.4 1.5 1.13 123.44
2020 c 2.5 2.1 3.1 3.2 1.7 1.6 -1.7 61.4 1.0 1.15 124.81
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
Gross domestic product, at current market prices
2011 a 2012 a Expenditure on GDP (Ps bn at current market prices) GDP Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services Stockbuilding
2,190.0 1,391.9 341.1 377.3 401.5 364.6 43.4
2,652.2 1,694.6 438.2 415.7 429.9 377.6 51.3
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
7,880.9
10,022. 8 6,414.2 1,889.3 1,620.1 1,310.1 1,373.1 162.2 10,085. 8
11,838. 3 7,562.5 2,177.1 1,957.0 1,585.8 1,657.2 213.1 11,909. 7
13,441. 8 8,596.4 2,462.8 2,288.3 1,825.4 1,929.6 198.5 13,545. 9
15,102. 9 9,558.8 2,732.4 2,606.5 2,093.0 2,245.4 357.5 15,255. 2
632.2 416.2 115.3 98.7 70.0 75.2 7.5 637.6
524.2 333.8 101.1 84.1 69.0 73.0 9.2 528.2
585.2 374.5 110.3 94.6 76.5 80.2 9.5 588.8
629.2 402.0 115.7 104.0 84.3 88.1 11.3 633.0
659.2 421.6 120.8 112.2 89.5 94.6 9.7 664.4
693.7 439.0 125.5 119.7 96.1 103.1 16.4 700.7
64.3 16.8 16.1 2.4 14.3 14.0
65.8 18.2 15.6 1.2 11.1 11.9
63.7 19.3 16.0 1.8 13.2 13.9
64.0 18.9 16.2 1.6 13.1 13.7
63.9 18.4 16.5 1.8 13.4 14.0
64.0 18.3 17.0 1.5 13.6 14.4
63.3 18.1 17.3 2.4 13.9 14.9
675 c 17.1
680 c 14.3 c
690 15.1
720 15.4
750 16.2
790 16.3
790 17.5
3,359.7 2,193.0 560.9 548.1 489.1 493.0 59.2
4,606.0 2,963.6 773.0 739.7 658.0 642.7 110.7
5,837.1 3,842.6 1,064.4 911.2 646.8 693.9 69.2
7,821.9 4,980.0 1,508.8 1,254.7 1,029.8 1,088.8 137.4
Domestic demand 2,153.7 2,599.8 3,361.2 Expenditure on GDP (US$ bn at current market prices) GDP 532.8 584.6 615.4 Private consumption 338.7 373.5 401.7 Government consumption 83.0 96.6 102.7 Gross fixed investment 91.8 91.6 100.4 Exports of goods & services 97.7 94.8 89.6 Imports of goods & services 88.7 83.2 90.3 Stockbuilding 10.6 11.3 10.9 Domestic demand 524.0 573.0 615.7 Economic structure (% of GDP at current market prices) Private consumption 63.6 63.9 65.3 Government consumption 15.6 16.5 16.7 Gross fixed investment 17.2 15.7 16.3 Stockbuilding 2.0 1.9 1.8 Exports of goods & services 18.3 16.2 14.6 Imports of goods & services 16.6 14.2 14.7 Memorandum items Oil production ('000 b/d) 665 665 656 National savings ratio (%) 18.4 17.4 16.1
4,587.0
5,887.4
570.4 367.0 95.7 91.6 81.5 79.6 13.7 568.0
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate.
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37
Gross domestic product, at constant prices
2011 a 2012 a Real expenditure on GDP (Ps bn at constant 1993 prices) GDP 713.7 706.2 Private consumption 499.3 498.9 Government consumption 81.0 83.5 Gross fixed investment 150.8 139.0 Exports of goods & services 161.5 154.9 Imports of goods & services 192.2 183.1 Domestic demand 743.9 733.7 Real expenditure on GDP (% change) GDP 6.1 -1.1 Private consumption 8.9 -0.1 Government consumption 4.6 3.0 Gross fixed investment 17.6 -7.8 Exports of goods & services 4.1 -4.1 Imports of goods & services 22.0 -4.7 Domestic demand 10.3 -1.4 Real contribution to GDP growth (% points) Private consumption 6.0 -0.1 Government consumption 0.5 0.3 Gross fixed investment 3.4 -1.6 External balance -4.2 0.3
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
722.4 522.1 87.9 144.4 149.4 190.2 762.4
703.9 494.9 90.5 133.5 139.0 168.3 732.5
720.6 519.8 96.6 140.9 138.4 177.7 759.4
711.7 513.0 95.9 143.7 143.4 187.3 755.6
731.2 527.1 97.3 154.6 148.8 199.5 781.9
760.4 549.0 98.6 165.3 154.8 210.8 816.4
785.0 568.7 102.0 172.5 159.8 221.1 846.3
811.7 590.0 104.8 180.3 166.0 234.3 880.1
2.3 4.6 5.3 3.9 -3.5 3.9 3.9
-2.6 -5.2 2.9 -7.6 -7.0 -11.5 -3.9
2.4 5.0 6.7 5.5 -0.4 5.5 3.7
-1.2 -1.3 -0.7 2.0 3.6 5.4 -0.5
2.7 2.8 1.4 7.6 3.8 6.5 3.5
4.0 4.2 1.4 6.9 4.0 5.6 4.4
3.2 3.6 3.4 4.4 3.3 4.9 3.7
3.4 3.7 2.8 4.5 3.8 6.0 4.0
3.3 0.6 0.8 -1.8
-3.8 0.4 -1.5 1.6
3.5 0.9 1.0 -1.4
-0.9 -0.1 0.4 -0.6
2.0 0.2 1.5 -1.0
3.0 0.2 1.5 -0.7
2.6 0.4 1.0 -0.7
2.7 0.4 1.0 -0.9
2012 a
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
587.0 44.6 186.2 356.2
599.4 49.7 187.4 362.3
588.0 51.3 180.8 355.8
601.9 54.7 182.8 364.4
594.4 56.4 185.9 352.1
610.7 59.8 189.6 361.3
635.0 63.4 196.3 375.4
655.7 67.2 203.1 385.3
678.0 71.2 210.3 396.5
-13.0 -2.2 0.7
11.5 0.6 1.7
3.2 -3.5 -1.8
6.5 1.1 2.4
3.2 1.7 -3.4
6.0 2.0 2.6
6.0 3.5 3.9
6.0 3.5 2.6
6.0 3.5 2.9
9.1 30.5 60.4
9.9 30.0 60.1
10.5 29.7 59.8
10.9 29.3 59.7
11.4 30.2 58.4
11.8 30.0 58.2
12.0 29.9 58.1
12.3 29.9 57.7
12.6 30.0 57.4
-7.8
0.0
-1.8
1.7
2.0
3.5
3.5
3.5
a Actual. b Economist Intelligence Unit forecasts.
Gross domestic product by sector of origin 2011 a Origin of GDP (Ps bn at constant 1993 prices) GDP at factor cost 595.5 Agriculture 51.2 Industry 190.5 Services 353.7 Origin of GDP (real % change) Agriculture -2.3 Industry 5.8 Services 6.7 Origin of GDP (% of factor cost GDP) Agriculture 10.7 Industry 31.1 Services 58.2 Memorandum item Industrial production (% change) 6.6
1.0 c
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate.
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Growth and productivity Growth and productivity (%) Labour productivity growth Total factor productivity growth Growth of capital stock Growth of potential GDP Growth of real GDP Growth of real GDP per head
Argentina
2011 a
2012 a
2013 a
2014 a
2015 a
3.3 2.0 6.7 5.7 6.1 c 4.9 c
-2.0 -2.6 2.6 -1.0 -1.1 c -2.2 c
1.3 0.9 3.7 2.7 2.3 c 1.2 c
-2.5 -2.5 1.6 -1.7 -2.6 c -3.6
1.8 1.2 2.3 2.7 2.4 c 1.3
2016 b
2017 b
2018 b
2019 b
2020 b
-2.4 -2.8 2.2 -1.2 -1.2 -2.3
0.9 0.5 3.0 2.5 2.7 1.7
2.4 1.8 3.5 3.9 4.0 2.9
1.7 1.0 3.7 3.1 3.2 2.2
1.9 1.1 3.8 3.3 3.4 2.4
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.
Economic structure, income and market size 2011 a Population, income and market size Population (m) 41.3 GDP (US$ bn at market exchange rates) 532.8 GDP per head (US$ at market exchange rates) 12,913 Private consumption (US$ bn) 338.7 Private consumption per head (US$) 8,208 GDP (US$ bn at PPP) 823.3 GDP per head (US$ at PPP) 19,953
2012 a
2013 a
2014 b
2015 b
2016 c
2017 c
2018 c
2019 c
2020 c
41.7
42.2
42.7
43.1
43.6
44.0
44.5
44.9
45.4
584.6
615.4
570.4 a
632.2 a
524.2
585.2
629.2
659.2
693.7
14,007 373.5 8,950 852.8 20,434
14,582 401.7 9,518 918.0 21,751
13,367 367.0 a 8,601 909.2 a 21,307
14,657 416.2 a 9,649 940.1 a 21,795
12,026 333.8 7,657 945.9 21,701
13,286 374.5 8,502 989.8 22,472
14,141 402.0 9,034 1,050.5 23,609
14,670 421.6 9,382 1,100.0 24,479
Personal disposable income (Ps bn) 1,496.7 b 1,822.1 b 2,358.0 b 3,186.7 4,131.8 5,398.3 Personal disposable income (US$ bn) 0.4 b 0.4 b 0.4 b 0.4 0.4 0.4 Growth of real disposable income (%) 8.9 b -0.1 b 4.6 b -5.2 5.0 -0.5 Memorandum items Share of world population (%) 0.59 0.59 0.59 0.59 0.59 0.59 Share of world GDP (%; market exchange rates) 0.74 0.79 0.81 0.74 a 0.87 a 0.71 Share of world GDP (%; PPP) 0.88 0.87 0.89 0.84 a 0.84 a 0.81 Share of world exports of goods (%) 0.47 0.44 0.41 0.37 a 0.35 a 0.37
6,895.7
8,185.6
9,415.3
15,287 439.0 9,675 1,155.9 25,474 10,584. 1
0.4
0.4
0.5
0.5
1.9
4.9
4.8
4.9
0.59
0.59
0.59
0.59
0.76 0.80 0.39
0.78 0.81 0.40
0.78 0.81 0.42
0.78 0.81 0.43
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
Fiscal indicators Fiscal indicators (% of GDP) Government expenditure Interest Non-interest Government revenue Budget balance Primary balance Government debt
2011 a
2012 a
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
21.3 1.6 19.6 19.9 -1.4 0.2 35.1
22.8 1.9 20.9 20.8 -2.1 -0.2 36.5
23.3 1.3 22.0 21.4 -1.9 -0.7 39.3
24.9 1.6 23.3 22.2 -2.7 -1.1 41.0
27.5 2.1 25.4 22.7 -4.8 -2.8 50.1
27.0 2.1 25.0 22.1 -4.9 -2.9 53.8
26.9 2.2 24.7 22.6 -4.3 -2.1 51.3
26.1 2.3 23.8 23.1 -3.0 -0.7 50.6
26.0 2.5 23.5 23.2 -2.8 -0.3 50.4
25.6 2.5 23.1 23.2 -2.4 0.1 50.2
a Actual. b Economist Intelligence Unit forecasts.
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Argentina
Monetary indicators Monetary indicators Exchange rate Ps:US$ (av) Exchange rate Ps:US$ (year-end) Exchange rate Ps:€ (av) Exchange rate Ps:€ (year-end) Purchasing power parity Ps:US$ (av) Lending rate (av; %) Deposit rate (av; %) Money-market rate (av; %)
39
2011 a
2012 a
2013 a
4.11 4.28 5.72 5.54 2.66 14.1 10.7 10.0
4.54 4.90 5.83 6.46 3.11 14.1 12.0 9.8
5.46 6.50 7.25 8.97 3.66 17.1 14.9 13.1
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
8.08 8.51 10.73 10.33 5.07 24.0 20.4 17.9
9.23 13.10 10.25 14.26 6.21 24.9 21.2 22.0
14.92 16.20 16.19 17.09 8.27 31.2 25.5 31.7
17.13 17.98 18.37 19.60 10.13 24.5 18.9 23.7
18.81 19.66 20.98 22.12 11.27 15.5 10.0 14.3
20.39 21.12 23.09 23.98 12.22 11.3 5.9 10.2
21.77 22.41 24.93 25.99 13.07 10.2 4.8 9.1
2014 a
2015 b
2016 c
2017 c
2018 c
2019 c
2020 c
17.3 b 0.5 b 7.3
17.5 1.1 7.6
17.7 1.3 8.0
17.9 1.4 7.6
18.2 1.3 7.5
18.4 1.3 7.3
18.7 1.3 7.1
38.1 38.0 26.5 40.7 42.5
26.5 a 26.9 a 11.9 23.8 a 23.5 a
42.8 43.4 39.8 35.7 31.3
23.5 17.2 18.0 24.7 25.4
13.6 10.7 12.6 13.6 13.2
9.4 8.7 8.7 10.0 9.7
7.9 7.1 8.1 8.7 7.2
33.9 46.0 32.8 -3.8 36.2 b -7.9 b 42.0 b 5.2 b
29.0 a 16.7 a 29.9 2.7 28.7 12.6 54.6 5.9
42.8 35.0 29.0 -9.6 33.2 -17.6 70.5 4.7
23.5 20.0 23.7 0.2 23.6 7.6 87.2 5.1
13.6 13.0 14.4 0.7 12.7 2.6 99.7 5.3
9.4 12.0 11.2 1.6 10.3 1.8 110.9 5.4
7.9 9.0 9.3 1.3 8.3 1.4 121.2 5.6
a Actual. b Economist Intelligence Unit forecasts.
Employment, wages and prices
2011 a 2012 a 2013 a The labour market (av) Labour force (m) 16.9 17.1 17.2 Labour force (% change) 2.1 1.0 0.9 Unemployment rate (%) 7.2 7.2 7.1 Wage and price inflation (% except labour costs per hour) Consumer prices (av) 24.4 25.3 20.7 Consumer prices (year-end) 23.6 26.8 26.6 Producer prices (av) 14.0 13.4 14.9 GDP deflator (av) 23.6 22.4 23.8 Private consumption deflator (av) 20.0 21.8 23.7 Government consumption deflator (av) 29.9 24.7 21.5 Fixed investment deflator (av) 15.2 19.5 26.9 Average nominal wages 27.7 26.8 25.1 Average real wages 2.7 1.2 3.6 Unit labour costs (Ps-based; av) 23.6 b 29.4 b 23.5 b Unit labour costs (US$-based) 17.2 b 17.2 b 2.6 b b b Labour costs per hour (Ps) 20.0 25.3 31.6 b b b Labour costs per hour (US$) 4.9 5.6 5.8 b
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
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Argentina
Current account and terms of trade Current account (US$ bn) Current-account balance Current-account balance (% of GDP) Goods: exports fob Goods: imports fob Trade balance Services: credit Services: debit Services balance Primary income: credit Primary income: debit Primary income balance Secondary income: credit Secondary income: debit Secondary income balance Memorandum item Export market growth (%)
2011 a
2012 a
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
-4.5 -0.8 82.9 -70.8 12.2 15.3 -17.5 -2.2 3.2 -17.1 -13.9 2.3 -2.8 -0.6
-1.4 -0.2 80.0 -65.0 14.9 15.0 -18.0 -3.0 2.3 -15.1 -12.9 2.1 -2.7 -0.5
-12.1 -2.0 76.0 -71.3 4.7 14.6 -18.3 -3.7 2.4 -14.7 -12.3 2.2 -3.1 -0.8
-8.0 -1.4 68.4 -62.4 6.0 13.7 -16.8 -3.1 2.6 -13.3 -10.8 2.0 -2.2 -0.2
-15.9 -2.5 56.8 -57.2 -0.4 13.9 -17.8 -3.9 2.3 -13.6 -11.3 1.9 -2.3 -0.4
-14.3 -2.7 58.4 -57.2 1.2 14.1 -18.3 -4.2 2.5 -13.4 -10.8 1.6 -2.0 -0.4
-14.1 -2.4 64.6 -63.1 1.5 15.1 -19.2 -4.1 3.0 -14.0 -11.1 1.8 -2.2 -0.5
-13.2 -2.1 72.4 -69.6 2.8 16.1 -20.7 -4.6 3.4 -14.4 -10.9 1.9 -2.4 -0.5
-14.2 -2.2 78.2 -75.5 2.7 16.6 -22.0 -5.4 3.8 -15.1 -11.3 2.3 -2.6 -0.3
-14.8 -2.1 85.5 -82.4 3.0 17.2 -23.5 -6.2 4.1 -15.3 -11.1 2.5 -2.9 -0.4
-2.3
5.4
4.5
3.3
3.6
7.8 c
1.0 c
5.6 c
2.0 c
-3.8 c
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate.
Foreign direct investment Foreign direct investment (US$ bn) Inward direct investment Inward direct investment (% of GDP) Inward direct investment (% of gross fixed investment) Outward direct investment Net foreign direct investment Stock of foreign direct investment Stock of foreign direct investment per head (US$) Stock of foreign direct investment (% of GDP) Memorandum items Share of world inward direct investment flows (%) Share of world inward direct investment stock (%)
2011 a
2012 a
2013 a
2014 a
2015 a
2016 b
2017 b
2018 b
2019 b
2020 b
10.8 2.0
15.3 2.6
9.8 1.6
5.1 0.9
12.0 1.9
9.5 1.8
12.0 2.1
12.4 2.0
13.6 2.1
13.6 2.0
11.8 -1.5 9.4 93.2
16.7 -1.1 14.3 100.4
9.8 -0.9 8.9 93.7
5.5 -1.9 3.1 82.2
12.1 -0.9 11.1 94.2
11.4 -0.9 8.6 103.7
12.7 -1.2 10.8 115.8
11.9 -1.2 11.2 128.2
12.1 -1.0 12.6 141.8
11.4 -1.1 12.5 155.4
2,259
2,407
2,220
1,927
2,184
2,380
2,628
2,881
3,155
3,424
17.5
17.2
15.2
14.4
14.9
19.8
19.8
20.4
21.5
22.4
0.42
0.64
0.38
0.29
0.55
0.43
0.52
0.52
0.56
0.54
0.46
0.46
0.41
0.33
0.36 c
0.37
0.39
0.40
0.41
0.44
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate.
External debt External debt Total external debt (US$ bn) Total external debt (% of GDP) Debt/exports ratio (%) Debt-service ratio, paid (%)
2011 a
2012 a
2013 a
2014 b
2015 b
2016 c
2017 c
2018 c
2019 c
2020 c
132.7 24.9 130 15.4
133.0 22.8 136 13.4
136.3 22.1 146 14.5
140.4 24.6 165 16.2
136.1 21.5 185 19.0
155.1 29.6 205 18.8
164.7 28.2 198 19.3
176.7 28.1 191 18.8
186.3 28.3 188 19.0
196.6 28.3 183 18.0
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
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Argentina
41
Data sources and definitions Sources for global and domestic data refer to historical data. The source for all forecast data, unless otherwise stated, is The Economist Intelligence Unit Global data US and European GDP growth: OECD World trade growth: Economist Intelligence Unit aggregate OECD consumer price inflation: OECD Commodity prices: IFS; non-oil Oil prices: Brent average import price US$ 3-month commercial paper rate: IFS US effective exchange-rate index: IFS; nominal weighted index, 1990=100 Domestic data Trade by country: IMF, Direction of Trade Statistics Yearbook US$ GDP: IFS; local-currency GDP converted to US dollars at annual average market exchange rate US$ GDP at PPP: IFS; Economist Intelligence Unit; local-currency GDP converted to US dollars at estimated annual average of consumer products’ PPP Population and growth: Celade Non-financial public-sector (NFPS) balance: excludes privatisation revenue Prime lending rate: simple average rate charged on local-currency 30-day loans to creditworthy businesses Deposit rate: average rate weighted by deposit amount on 30- to 59-day time deposits Inflation: IFS; derived from consumer price index (CPI) for Buenos Aires metropolitan area, 1999=100 Labour costs: hourly wage in industrial sector Real exchange rate: Economist Intelligence Unit; a real exchange rate of less than 100% indicates that the currency is undervalued vis-à-vis relative prices and vice versa Balance of payments: IFS Long-term external debt: World Bank, International Debt Statistics; year-end medium and long-term publicly guaranteed and non-guaranteed debt outstanding with an original maturity in excess of one year, plus arrears and year-end IMF debt outstanding Total external debt: sum of long-term debt, short-term debt and arrears Total debt service: World Bank, International Debt Statistics; principal repayments made against long-term debt, plus interest payments and IMF charges paid against total external debt Debt-service ratio: ratio of total debt service paid to exports of goods and services Abbreviations Celade: Centro Latinoamericano y Caribeño de Demografía IFS: International Financial Statistics PPP: purchasing power parity; average ratio of prices in Argentina to prices in the US
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42
Argentina
Guide to the business rankings model Outline of the model
Calculating the rankings
The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by Country Forecast using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows The Economist Intelligence Unit to utilise the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis.
The rankings are calculated in several stages. First, each of the 91 indicators is scored on a scale from 1 (very bad for business) to 5 (very good for business). The aggregate category scores are derived on the basis of simple or weighted averages of the indicator scores within a given category. These are then adjusted, on the basis of a linear transformation, to produce index values on a 1-10 scale. An arithmetic average of the ten category index values is then calculated to yield the aggregate business environment score for each country, again on a 1-10 scale.
The business rankings model examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market, and infrastructure. Each category contains a number of indicators that are assessed by The Economist Intelligence Unit for the last five years and the next five years. The number of indicators in each category varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total.
The use of equal weights for the categories to derive the overall score reflects in part the theoretical uncertainty about the relative importance of the primary determinants of investment. Surveys of foreign direct investorsr intentions yield widely differing results on the relative importance of different factors. Weighted scores for individual categories based on correlation coefficients of recent foreign direct investment inflows do not in any case produce overall results that are significantly different from those derived from a system based on equal weights. For most quantitative indicators the data are arrayed in ascending or descending order and split into five bands (quintiles). The countries falling in the first quintile are assigned scores of 5, those falling in the second quintile score 4 and so on. The cut-off points between bands are based on the average of the raw indicator values for the top and bottom countries in adjacent quintiles. The 2011-15 ranges are then used to derive 2016-20 scores. This allows for intertemporal as well as cross-country comparisons of the indicator and category scores.
Almost half of the indicators are based on quantitative data (eg GDP growth), and are mostly drawn from national and international statistical sources for the historical period (2011-15) and from Economist Intelligence Unit assessments for the forecast period (2016-20). The other indicators are qualitative in nature (eg quality of the financial regulatory system), and are drawn from a range of data sources and business surveys adjusted by The Economist Intelligence Unit for 2011-15. All forecasts for the qualitative indicators covering 2016-20 are based on Economist Intelligence Unit Measurement and grading issues assessments. The indices and rankings attempt to measure the average quality of the business environment over the entire The main sources used in the business rankings model historical or forecast period, not simply at the start or at the include CIA, World Factbook; The Economist Intelligence end of the period. Thus, in the forecast we assign an average Unit, Country Risk Service, Country Commerce; Freedom grade to elements of the business environment over 2016-20, House, Annual Survey of Political Rights and Civil Liberties; not to the likely situation in 2020 only. Heritage Foundation, Index of Economic Freedom; IMF, Annual Report on Exchange Arrangements and Exchange The scores based on quantitative data are usually calculated Restrictions; International Institute for Management on the basis of the numeric average for an indicator over the Development, World Competitiveness Yearbook; International period. In some cases, the “average” is represented, as an Labour Organisation, International Labour Statistics Yearbook; approximation, by the recorded value at the mid-point of the UN, Human Development Report; US Social Security period (2013 or 2018). In only a few cases is the relevant Administration, Social Security Programs Throughout the variable appropriately measured by the value at the start of World; World Bank, World Development Report; World the period (eg educational attainments). For one indicator Development Indicators; World Economic Forum, Global (the natural resources endowment), the score remains Competitiveness Report. constant for both the historical and forecast periods.
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43
Indicator scores in the business rankings model 2011-15
Political environment 1. Risk of armed conflict 2. Risk of social unrest 3. Constitutional mechanisms for the orderly transfer of power 4. Government and opposition 5. Threat of politically motivated violence 6. International disputes or tensions 7. Government policy towards business 8. Effectiveness of political system in policy formulation and execution 9. Quality of the bureaucracy 10. Transparency and fairness of legal system 11. Efficiency of legal system 12. Corruption 13. Impact of crime Macroeconomic environment 1. Inflation* 2. Budget balance as % of GDP* 3. Government debt as % of GDP* 4. Exchange-rate volatility* 5. Current-account balance as % of GDP* 6. Quality of policymaking 7. Institutional underpinnings 8. Asset prices Market opportunities 1. GDP, US$ bn at PPP* 2. GDP per head, US$ at PPP* 3. Real GDP growth* 4. Share of world merchandise trade* 5. Average annual rate of growth of exports* 6. Average annual rate of growth of imports* 7. The natural resource endowment* 8. Profitability* 9. Regional integration 10. Proximity to markets Policy towards private enterprise and competition 1. Degree to which private property rights are protected 2. Government regulation on setting up new private businesses 3. Freedom of existing businesses to compete 4. Promotion of competition 5. Protection of intellectual property 6. Price controls 7. Distortions arising from lobbying by special interest groups 8. Distortions arising from state ownership/control 9. Minority shareholders Policy towards foreign investment 1. Government policy towards foreign capital 2. Openness of national culture to foreign influences 3. Risk of expropriation of foreign assets 4. Availability of investment protection schemes 5. Government favouritism
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2016-20
Argentina
Regional averagea
Argentina
Regional averagea
5 3 3 3 3 2 2 3 3 3 2 2 3
4.0 2.9 3.3 3.3 3.6 3.3 2.9 2.7 2.6 2.6 2.4 2.1 2.6
5 3 3 4 3 4 4 3 3 3 3 3 3
4.1 2.8 3.5 3.3 3.7 3.9 3.6 2.9 2.7 2.8 2.5 2.4 2.6
2 4 4 2 5 2 2 1
3.7 3.5 4.3 3.4 3.5 3.1 3.3 2.8
3 3 4 4 4 4 4 3
3.8 3.3 4.0 4.0 3.5 3.3 3.3 2.9
4 3 3 3 1 1 4 4 3 1
2.9 2.2 3.0 2.2 1.8 2.0 3.2 3.5 3.0 2.3
4 3 3 2 2 3 4 3 3 1
3.0 2.3 2.7 2.0 1.7 2.1 3.2 3.0 3.2 2.1
2 3 2 3 3 2 3 2 3
3.1 2.8 3.2 2.6 2.6 3.3 2.4 3.0 2.5
4 4 4 3 3 4 3 3 3
3.4 3.0 3.4 2.8 2.8 3.8 2.4 3.1 2.7
3 4 2 2 2
3.5 3.8 3.3 2.9 3.0
4 4 3 4 3
3.8 3.8 3.7 3.3 3.3
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Argentina
Foreign trade and exchange controls 1. Capital-account liberalisation 2. Tariff and non-tariff protection** 3. Ease of trading 4. Openness of trade* 5. Restrictions on the current account Taxes 1. The corporate tax burden** 2. The top marginal personal income tax* 3. Value-added tax* 4. Employers' social security contributions 5. Degree to which fiscal regime encourages new investment 6. Consistency and fairness of the tax system 7. Tax complexity Financing 1 Health and soundness of banking sector 2. Stockmarket capitalisation 3. Distortions in financial markets** 4. Quality of the financial regulatory system 5. Access of foreigners to local capital market 6. Access to medium-term finance for investment The labour market 1. Labour costs adjusted for productivity* 2. Availability of skilled labour* 3. Quality of workforce 4. Quality of local managers 5. Degree to which language skills meet business needs 6. Health of the workforce 7. Level of technical skills 8. Cost of living* 9. Incidence of strikes** 10. Restrictiveness of labour laws 11. Extent of wage regulation 12. Hiring of foreign nationals Infrastructure 1. Telephone density* 2. Reliability of telecoms network** 3. Telecoms costs* 4. Mobiles* 5. Stock of personal computers* 6. Internet use* 7. Broadband penetration* 8. R&D expenditure as % of GDP* 9. Research infrastructure 10. The infrastructure for retail and wholesale distribution** 11. Extent and quality of the road network** 12. Extent and quality of the rail network** 13. Quality of ports infrastructure 14. Quality of air transport infrastructure 15. Production of electricity per head* 16. Rents of office space*
2 3 3 2 3
3.7 3.5 3.3 3.2 4.2
4 3 4 2 4
3.9 3.7 3.5 3.2 4.3
3 4 2 2 2 2 2
3.6 4.7 3.2 3.3 2.5 2.4 2.3
3 4 2 2 3 3 2
3.6 4.6 3.3 3.5 2.5 2.7 2.4
2 3 2 3 2 2
3.0 2.5 3.3 3.1 3.1 2.5
3 3 3 3 4 3
2.9 2.6 3.6 3.2 3.3 2.8
1 4 4 4 3 4 4 3 2 3 3 4
3.3 2.5 3.0 3.5 3.1 3.8 3.1 2.7 3.1 2.7 3.3 3.8
1 4 4 4 3 4 4 5 2 3 3 4
3.2 3.3 3.1 3.5 3.1 4.0 3.1 3.6 3.2 2.8 3.3 3.8
3 4 5 5 5 5 5 3 3 3 4 3 3 3 3 2
2.8 4.0 3.7 4.4 4.0 4.3 4.2 2.3 2.8 2.4 3.1 2.3 3.0 3.2 2.3 3.2
3 4 5 5 5 5 5 3 3 3 4 3 3 3 3 2
2.5 3.7 3.7 4.5 4.3 4.7 4.5 2.4 2.8 2.6 3.2 2.2 3.1 3.3 2.6 3.0
Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature. a Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and
Venezuela.
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